Home-improvement giant Home Depot (NYSE:HD) had another banner year in 2014, with the stock's 30% gain easily beating the market. As conditions in the housing market and the overall economy improve, more homeowners have been in position to remodel and renovate their homes. That has bolstered Home Depot's direct-to-homeowner do-it-yourself business, and has also helped the company cater more to its professional contractor customers. Yet with the stock repeatedly hitting new record highs throughout the year, the question going into 2015 is whether Home Depot is still a smart buy. Let's look at the company's prospects for next year.
A strong economy vs. a terrible data breach
Home Depot's performance in 2014 has featured two parallel storylines. On one hand, the company saw a number of favorable initiatives bear fruit this year, generating much-needed growth from the continuing rise in home prices and overall economic strength in the U.S. consumer market. Over the last 12 months, more Home Depot customers proved willing to pay for services directly from the company, which has provided a high-ticket, high-margin revenue source to go with the retailer's more basic retail-sales business. Moreover, enhancements to Home Depot's website have made it easier for customers to order items more conveniently, while the company's in-store availability has drawn many of those online-ordering customers to go to local stores to pick up items. That seamless interconnectivity between e-commerce and store retail has appealed both to do-it-yourselfers and contractor professionals.
Yet all that good news was tarnished by Home Depot's revelation in September that it had suffered a massive data breach that exposed millions of customers' information to hackers. Home Depot said information on 56 million credit and debit cards had been taken in the attack, and 53 million email addresses also wound up in criminals' hands. Coming in the wake of a similarly large hacker attack on Target (NYSE:TGT) in late 2013, Home Depot investors worried the breach would make customers less willing to shop at the home-improvement retailer's stores. Moreover, since the breach, Home Depot has had to deal with costly fraud-related damages and now faces dozens of lawsuits alleging the company did not take enough care in protecting customer data.
However, on the whole, investors seem to have discounted the long-term effect of the data breach, focusing instead on the progress Home Depot has made in courting homeowners and professional contractors. As more companies are targeted in hacking attacks, customers are growing accustomed to breaches simply being part of doing business, and that should make them less likely to abandon Home Depot solely because of the cyberattack.
Is Home Depot getting too pricey?
One major concern among some investors is that Home Depot's valuation has been rich for a long time. Currently, shares of the home-improvement giant fetch about 24 times trailing earnings and almost 20 times projected earnings for the next fiscal year.
Those valuations have spurred some investors' urge to sell. Hedge fund Citadel Advisors, which reported assets of nearly $80 billion under management, sold off almost three-quarters of its stake in Home Depot during the third quarter of 2014.
Yet by many measures, Home Depot looks like a better value than many of its blue-chip peers. Unlike many consumer stocks that don't have much prospect for growth in their fundamental business models, Home Depot continues to post solid gains in revenue and earnings, and investors believe the company will manage growth rates exceeding 15% annually over the next five years. With gains from productivity improvements and balance-sheet adjustments becoming harder to capture, the fundamental growth from Home Depot's business will look increasingly attractive, and that arguably justifies a premium valuation compared to the overall market.
Should Home Depot be on your 2015 wish list?
It's always hard to work up the nerve to buy a stock at an all-time high, and Home Depot is far from invulnerable to macroeconomic trends that could hamper its growth in 2015 and beyond. Nevertheless, with a strong track record of defying naysayers throughout its history, betting against Home Depot is always a dicey proposition at best. Even above $100 per share, Home Depot still has the business momentum to deliver solid returns to long-term investors.