The Giant Lumberjack Lumbers On

You would think that Home Depot (NYSE:HD), the Paul Bunyan of home improvement retailers, would need a breather after the year of hatchet work it put in. For 2004, its revenues were up a log-splintering 12.5% to $72.9 billion, while its earnings per share climbed 20% to $2.26. But no, the company doesn't appear to be slowing down much for 2005.

Coming off of 5% comparable-store sales for 2004, Home Depot projects its comps to remain in the 4% to 7% range for this year. As for its total sales, the company is expecting growth from 9% to 12%. From the revenues, it is forecasting an EPS increase of 10% to 14%. And with 1,866 stores already under its belt and an estimated 175 new stores on the way, this giant of lumberjacks just keeps growing.

Bigger doesn't always mean better, but Home Depot is trying awfully hard at both. The company is not only increasing in size but also continuing to improve on an operational level. Through three quarters in 2004, its operating margins climbed to 11.1%, compared with 10.7% during the same period a year ago. Its strengthening margins are leading to robust structural free cash flow, which is ultimately making its way over to a balance sheet that reads $3.4 billion in cash and equivalents.

The Home Depot ax is indeed looking sharp, but if there is a logjam in the company's future, it might be its competition. Lowe's (NYSE:LOW) is showing no signs of fatigue. And with the upcoming merger between Sears (NYSE:S) and Kmart (NASDAQ:KMRT), the market could be as fierce as ever. But as the Paul Bunyan of its industry, continuing to increase in size and outperform on an operational level, Home Depot is well-positioned to take a chop at both.

While Lowe's and Home Depot duke it out, investors might be wondering which one to bet on. You probably can't go wrong by investing in both. With Home Depot's projection of approximately $2.50 in EPS for 2005, the stock -- priced at around $41 -- is valued at 16 times forward earnings. A buy at this level makes sense for investors with a long-term horizon, but given the estimated growth rate, the shares may be a notch on the rich side.

Sit back and enjoy the lumberjack games, and with time you may be able to find a better bargain in Home Depot.

Fool contributor Jeremy MacNealy does not own shares in any of the companies mentioned.