After initially crashing at the pandemic's onset, Home Depot's (HD 1.96%) market capitalization had nearly tripled before shedding over $100 billion in 2022. The home improvement retailer was a surprise winner during the pandemic phases, where business closures were common. Stuck at home with limited options on what they could do with their time and money, consumers opted to take on more home improvement projects.
As a result, Home Depot's revenue and profits surged. Unfortunately for shareholders, the trend is reversing, and economic reopening following widespread vaccination is slowing growth. The investor exodus has caused more than $100 billion to be wiped off the company's market cap -- which may have some folks wondering if they should buy Home Depot stock now. Let's take a closer look at that question.
Home Depot is growing EPS at a solid clip
When recent performance has been volatile, it helps to look at the longer term. Home Depot has grown revenue in the previous decade at a compound annual rate of 7.9%. The unprecedented circumstances of the pandemic caused sales to surge in its two most-recent fiscal years.
But investors would be prudent to expect the longer-term growth rates instead. Focusing on the long run could help alleviate worry over the next year or two, when the company's growth is likely to be muted. Indeed, management has forecast revenue growth of just 3% in its current fiscal year.
But that is not something that should discourage investors, especially with a business like Home Depot, which does an excellent job of leveraging fixed costs to deliver profits. In the same 10 years mentioned above, when revenue grew by 7.9%, the company increased earnings per share (EPS) at a compound annual rate of 20.2%.
Its results highlight that not all revenue growth is equal. Today, many businesses are growing remarkably fast but are generating massive losses on the bottom line without demonstrating any economies of scale.
Besides the short-term headwind from economic reopening, Home Depot's long-term prospects are in good shape. Management often says the No. 1 indicators of home improvement spending are home values. When homeowners see their home prices rise, they are encouraged to spend on improvement projects. And according to the Federal Reserve Bank of St. Louis, home prices have never been higher.
Add in the fact that many homeowners locked in record-low interest rates at the initial stages of the pandemic, which have since risen, and they are more likely to choose home renovation rather than looking to sell and move to a new home.
The Bottom Line
So is Home Depot stock expensive? If measured by the price-to-free-cash-flow ratio, Home Depot is on the expensive side of its historical valuation. But if you measure by its price-to-earnings multiple, the stock has scarcely ever been cheaper in the past decade.
I prefer to use a blended approach to encompass both metrics, and from that viewpoint, I would argue that the shares are fairly valued, neither expensive nor cheap.
So to answer the question posed in the headline, yes, you can buy Home Depot stock now. Investors will do well if they buy excellent companies at a fair price.