Please ensure Javascript is enabled for purposes of website accessibility

What Took Home Depot to New Highs in 2012?

By Alex Planes - Dec 11, 2012 at 11:30AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The home improvement warehouse has gotten investors excited.

Now that 2012 is nearly in the rearview mirror, investors are beginning to sift through the market for the best stocks of the upcoming year. The future is plagued with uncertainty, but that has always been the case, and it has never stopped us from seeking out long-term values. One way to find those values is to look for companies with a long history of success. The Dow Jones Industrial Average (^DJI 1.05%) contains many such companies, but some are better investments than others.

Today we'll be taking a look at Home Depot (HD 1.75%), a Dow component since 1999, to see whether its past-year performance holds some clues for 2013.

First-half recap
Home Depot has been one of the Dow's superstars in 2012, as you can see here:

HD Total Return Price Chart

HD Total Return Price data by YCharts.

Let's take a look at a few financial snapshots of its recent performance to see if this growth has been driven by fundamentals or something else:

Market Cap

$96.5 billion

P/E and Forward P/E

22.9, 18.1

Price to Free Cash Flow

19.1

TTM Revenue Growth

4.3%

TTM Net Income Growth

16%

TTM Free-Cash-Flow Growth

(0.4%)

MRQ Revenue

$72.5 billion

MRQ Net Income/Loss

$4.3 billion

MRQ Free Cash Flow

$4.5 billion

2013 Projected Growth Rate

14.1%

Sources: Morningstar; Yahoo! Finance; YCharts. TTM = trailing 12 months. MRQ = most recent quarterly.

What the numbers don't tell you
At first glance, it certainly appears that Home Depot has generated more excitement than growth. A 16% growth rate is nothing to sneeze at, but it's also worth keeping an eye on valuation, which is at multiyear highs in terms of P/E and is almost 50% higher than it was at the end of 2011's third quarter.

There have been a number of economic narratives this year, but the one most on Home Depot's side is the housing rebound. Whether homeowners are sprucing up their places or homebuilders are buying up supplies, Home Depot and its home-improvement retailing peer Lowe's (LOW 1.54%) will benefit from the demand.

According to recent earnings reports, major homebuilders PulteGroup (PHM 6.54%), D.R. Horton (DHI 5.89%), and Hovnanian (HOV 7.97%) are all seeing substantial new-contract growth over 2011. This backs up recent reports that housing starts are at multiyear highs, just like Home Depot's P/E ratio.

The "sprucing up" option has also been gathering steam. A glance at paint companies Sherwin Williams (SHW 5.06%), PPG Industries (PPG 3.08%), and Valspar (VAL) shows three tightly focused companies that have grown at an even faster rate than Home Depot, with all but PPG well above their five-year average P/E ratios. Optimism is everywhere in the housing industry.

The Case-Shiller Home Price Index has finally bounced in 2012, which will be important in adjusting homebuying perceptions. No one wants to buy a house they expect will decline in value, particularly after witnessing the financial horrors of the housing crash. Stronger home prices create more demand for all the things you'd find in a Home Depot.

The only issue with Home Depot -- which is an issue shared by many construction-related peers -- is that its valuation is getting ahead of its fundamentals. Exuberance precedes recovery. If you've been riding that excitement over the past year, you're in great shape -- but if you're looking at home improvement stocks today, it's worth considering how much growth Home Depot will need in 2013 to justify another year of gains like 2012's. The 14.1% analyst consensus doesn't seem optimistic enough.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,097.26 (1.05%) $321.83
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$279.08 (1.75%) $4.81
The Sherwin-Williams Company Stock Quote
The Sherwin-Williams Company
SHW
$235.23 (5.06%) $11.32
The Valspar Corporation Stock Quote
The Valspar Corporation
VAL
Hovnanian Enterprises, Inc. Stock Quote
Hovnanian Enterprises, Inc.
HOV
$46.20 (7.97%) $3.41
PulteGroup, Inc. Stock Quote
PulteGroup, Inc.
PHM
$42.22 (6.54%) $2.59
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$177.36 (1.54%) $2.69
PPG Industries, Inc. Stock Quote
PPG Industries, Inc.
PPG
$117.86 (3.08%) $3.52
D.R. Horton, Inc. Stock Quote
D.R. Horton, Inc.
DHI
$70.09 (5.89%) $3.90

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.