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Home Depot Stock Looks Cheap. Is it a Buy?

By Jeremy Bowman - Updated Jun 4, 2021 at 11:35AM

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The home-improvement retailer has been on a tear. Can it continue?

With little fanfare, Home Depot (HD 1.35%) has been one of the biggest winners in the nation's pandemic-altered economy. The home-improvement retailer posted 20% comparable-sales growth last year, and its comp-sales growth accelerated to 31% in the first quarter of fiscal 2021. Earnings per share (EPS) nearly doubled year over year in fiscal Q1 (which ended May 2) to $3.86, easily beating estimates of $3.08.

Impressive performances for this company are nothing new: Home Depot has been one of the best investments on the market since it went public in 1981. In fact, if you had bought the stock at the initial public offering (IPO) price and held on until today, you'd have made a return of more than 1,000,000%.

The company rivals Walmart as the most valuable brick-and-mortar retail stock in the world, though its revenue is much lower than Walmart's. That's a testament to Home Depot's more efficient business model, higher operating margin, and brighter prospects.

In spite of its top-notch long-term track record and particularly sterling performance during the pandemic, the stock currently trades at a modest price-to-earnings ratio of 23, significantly below the average for the S&P 500. Is the stock a buy today?

A Home Depot employee in one of the aisles.

Image source: Home Depot.

A year of uncertainty

As Americans spent more time at home during the pandemic, they directed a greater share of their spending toward purchases to make those homes more comfortable. Sales boomed for companies across the home-improvement and home-furnishings segments. 

However, comparisons will get difficult for Home Depot and its peers over the rest of the year as they lap those strong 2020 quarters. Home Depot management declined to offer 2021 guidance due to the uncertainty around the U.S. economic reopening and what it might mean for spending in its niche.  

The good news for Home Depot is that the current housing-market boom looks sustainable, unlike the bubble of the 2000s. Americans have accumulated considerable equity in their homes and are likely to use that to fund further renovations and improvements.

Home value trends tend to correlate with trends in spending on maintenance and home improvement. Even in an environment where prices for key materials like lumber and steel are at record highs, Home Depot's sales in March and April were higher than during any month last year, which bodes well for the rest of 2021, as May is generally the company's strongest month. 

Meanwhile, the long-term trend toward remote work should also favor the retailer, as it will encourage more Americans to move into single-family housing. The boom in demand will also drive new construction.

A proven strategy

Home Depot has delivered steady returns through controlled growth that has avoided new store openings. Instead, it invested in its e-commerce infrastructure and store improvements, and focused on improving operating margins, repurchasing shares, increasing its dividend, and delivering a strong return on invested capital (ROIC). 

In 2020, its operating margin came in at 14% and its ROIC was 37%, showing the business is highly efficient.

Under the One Home Depot strategy, the company has also planned a multiyear investment of $11 billion to provide a seamless omnichannel experience for customers. That effort will include store improvements, enhanced e-commerce operations, and improved delivery options. This strategy is helping the company maintain its leadership in its niche and defend itself against potential threats from new entrants like Amazon.  

Is it a buy?

Home Depot's torrid growth rate is likely to slow down as it runs up against strong comparisons from 2020, but the company's long-term future continues to look bright. It essentially has a duopoly in home-improvement retail with Lowe's, but it outperforms its top competitor in key categories like operating margin and ROIC, showing it's the better of the two businesses. Meanwhile, the housing boom should give the company a boost over the next few years, and its omnichannel strategy has solidified it as the leader in home-improvement retail.

Home Depot is the rare company that offers growth, value, and income. At current share prices, its dividend yields 2.1%, and its current P/E of 23 looks quite affordable. This retail stock is a good bet to continue to outperform the market.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Home Depot. The Motley Fool recommends Lowes and recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$314.89 (1.35%) $4.20, Inc. Stock Quote, Inc.
$143.55 (2.07%) $2.91
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$132.22 (1.85%) $2.40
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$206.47 (2.12%) $4.29

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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