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Can This Home Improvement Giant Spruce Up Your Portfolio?

By Neil Patel – Nov 12, 2021 at 9:30AM

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To find the answer, investors should focus on new developments regarding a key customer group.

In its fiscal second quarter, which ended Aug. 1, Home Depot (HD -2.44%) generated record sales of $41.1 billion. Although the percentage gain was much lower than the previous four quarters, it was still an 8.1% year-over-year increase. The pandemic surge in home improvement spending still has legs. 

Home Depot has historically been a great stock to own, so you might be wondering if the outperformance will continue in the years ahead. This industry leader reports fresh financial results on Nov. 16, giving shareholders new information to make a more informed investment decision. 

Here's what you need to know. 

Two home improvement contractors on a job site.

Image source: Getty Images.

A meaningful slowdown 

For the just-finished and soon-to-be-reported fiscal 2021 third quarter, Wall Street expects Home Depot to produce revenue of $34.6 billion. Compared to Q3 2020, this is only a 3.3% rise. Earnings per share are forecast to come in at $3.35, or just a 5% jump from the year-ago period. Management hasn't been providing financial guidance because of the unpredictable nature of the ongoing pandemic, so it's difficult to gauge what exactly they are thinking. 

But over the next few quarters, Home Depot will lap some remarkable growth that it registered in prior-year periods, so I wouldn't put too much emphasis on the sales deceleration expected in the upcoming earnings report. The pandemic has caused lumpiness in the numbers of all sorts of companies, so it's best to focus on the long term. 

What matters most 

Home Depot is one of the best businesses around partly because of its mission-critical status with its most important customers, professionals. Representing 45% of sales, these contractors spend much more money than do-it-yourselfers. Homeowners are increasingly getting comfortable taking on bigger renovation projects; however, over the past two quarters, pro growth outpaced the DIY segment, a reversal of what the company experienced in 2020. 

Having a sizable chunk of business come from these high-value customers is why Home Depot maintains a 16.2% operating margin and a stellar return on invested capital of 44.7%, both of which have sustainably been higher than Lowe's, a competitor that has a much smaller pro business. 

Home Depot's One Supply Chain initiative, a five-year, $1.2 billion investment plan launched in 2017, will help build 150 domestic logistics facilities and bring same- or next-day delivery to 90% of the U.S. population some time in 2022. Add this to the company's existing footprint of 2,298 stores and you have a robust distribution network that acts as Home Depot's competitive advantage. Getting the right supplies, tools, and equipment to customers exactly when they need them is paramount in this industry, and Home Depot is second to none in this regard. 

Shareholders will want to pay attention to updates management provides next week regarding the professional business and the supply chain. These are key drivers of the company's success. If history is any indication, there's really nothing investors have to worry about. 

A portfolio fixer-upper 

I think buying Home Depot shares today is a smart move. The value consumers place on their homes, whether financial or emotional, has never been higher, and this trend is likely to continue far into the future. The company's ability to cater to this important need, thanks to its operational excellence, is why it stands to keep benefiting. 

Putting some money in Home Depot stock will likely spruce up your portfolio. 

Neil Patel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot. The Motley Fool recommends Lowes. The Motley Fool has a disclosure policy.

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