The Home Depot: Great Business, But The Stock Is Not A Buy Today

Home improvement giant Home Depot (HD) has had a very nice 2019 thus far. After plummeting from $213 to just $158 near the end of the year, the stock has rallied again to get back near its former highs.

In addition to its strong stock price gains, Home Depot rewards shareholders with impressive dividend increases. Home Depot is one of the highest dividend growth stocks in the Dow Jones Industrial Average. You can see the entire list of Dow 30 stocks here.

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This article will discuss Home Depot’s recent events as well as the value proposition the stock offers, as determined by our Sure Analysis Research Database, where we rank stocks based upon total expected returns.

Home Depot’s expected total returns have come down in recent weeks simply due to the rally in the stock. However, we still find the company to be very attractive over the long-term and think investors should consider buying the stock on the next pullback.

Business Overview & Recent Events

The first Home Depot store opened in 1979 after founders Bernie Marcus and Arthur Blank were fired from their jobs at a local hardware store. The plan was to create a superstore that would offer a larger assortment than what was available at the time, with highly trained staff that could help customers with their varying needs.

Home Depot went public in 1981, raising just over $4 million in capital from the offering, which was listed on the NASDAQ stock exchange. Nearly 40 years after the IPO, Home Depot has grown to almost 2,300 stores in three countries.

(Click on image to enlarge)

HD Overview

Source: Investor presentation, page 4

Home Depot employs more than 400,000 people. Its store base is highly concentrated in the U.S., but it has just over 100 stores in Mexico, and nearly 200 stores in Canada as well. Annual revenue is in excess of $110 billion, and the stock’s market capitalization is $225 billion, making Home Depot one of the largest retailers in the country.

Home Depot reported Q4 earnings on 2/26/19 and results were excellent, capping yet another year of very strong growth. For the quarter, the company reported total revenue of $26.5 billion, representing a 10.9% increase over the same period a year ago. Comparable sales continued their trek higher as well, adding 3.2% on a global, consolidated basis, and 3.7% in the U.S.

The fourth quarter of 2018 consisted of 14 operating weeks, compared to the normal 13 operating weeks. This additional week added $1.7 billion of revenue, although this is not included in the comparable sales gain.

Traffic, as measured by customer transactions, rose 7.7% in Q4 to 394.8 million. In addition, the average ticket was up 2.5% to $65.59 from $64.00 in the prior year’s fourth quarter. These numbers help drive comparable sales higher and for the full year, they rose 2.7% and 4.2%, respectively, with the former number being much higher in Q4 thanks in part to the additional operating week.

Gross margins rose very slightly in Q4 year-over-year, adding 10bps to come in at 34% of revenue. Home Depot’s gross margins don’t move much given the enormous and varying assortment it carries. This has been true for years as gross margins have oscillated around the 34% mark, but haven’t really shown any improvement.

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