What retail apocalypse? What trade war? What late-stage business cycle?
There are certain select companies that aren’t negatively affected by these issues. And certain of these select companies are also positively affected by the good things going on out there.
While the retail sector is undergoing one of the most trying times in decades, one retailer in particular is kicking butt and taking names. This company also operates exclusively in North America, and thus isn’t directly affected by the current trade war. It also has a recession resistant business. It’s Home Depot; and Home Depot stock is crushing it as a result.
Home Depot (HD) is the largest home improvement retailer in the world. It operates about 23,000 warehouse-format stores and offers nearly one million products online in the U.S., Canada and Mexico. I’m sure you’re familiar with it and its massive offering of paint, lumber, machinery and just about everything you could possibly need for a home improvement project. The company has over $100 billion in annual revenues.
But isn’t this a terrible time for retailers?
Malls are shuttering around the country. It’s like Gettysburg out there for many traditional brick and mortar retailers. These stores are getting killed by Amazon (AMZN), which offers just about every product online and provides free delivery. In addition, retail preferences are changing. People aren’t buying as much anymore, except for technology and healthcare, and are opting more for experiences.
So why is Home Depot thriving? Here are three reasons:
3 Home Depot Stock Drivers
Home Depot is not particularly vulnerable to online competition. For one thing, most of its products are heavy and inexpensive. Those kinds of products are bad for Amazon’s margins, since they offer free delivery. They aren’t interested in that business. It’s also true that the home improvement stuff is something that people tend to want to inspect in person. And home improvement isn’t going out of style.
I can speak from personal experience. I’m a homeowner but I’m not handy at all. I do even less now than I used to and I hire someone to do just about everything. When I absolutely have to do something around the house I opt for the local hardware store if possible, because it’s the more hassle-free option. And I’m still at Home Depot all the time!
I have to get some weird light bulb for the kitchen. I need a new grill, or snow blower, or vanity for the basement bathroom. Most of the time my wife just sends me to get something.
So if I’m at Home Depot all the time, what’s it like for all the manlier homeowners out there? I guess that’s why the parking lot is always packed. Look at the numbers. The past five years have been tumultuous for many retailers, but not Home Depot; it has grown earnings an average of about 20% per year in that time. That’s particularly impressive for a retailer of its size.
Of course, any mention of Home Depot begs the question: what about Lowe’s (LOW)? That’s the major competitor. But I like HD a lot better.
Lowe’s hasn’t really come to terms with its bigness and is in midst of a turnaround. Margins are being hurt by inadequate tracking systems, pricing mechanisms and cost controls. It may take them a while to get their act together. Why wait while they fumble around? Home Depot is working seamlessly in these areas and is already running downfield with the ball.
The Track Record
Home Depot has been big and well known for a long time. Here’s what Home Depot stock has been doing: over the past 10 years it has returned more than 1,000%. That’s an average return of more than 27% per year, and $10,000 invested in HD stock 10 years ago would be worth over $112,000 today (with dividends reinvested). It also averaged a return of 23% over the past five years and 20% over the last three. Recent returns are a little lower because HD had a negative return in 2018.
But how will Home Depot stock look over the next five years?
A big part of growth going forward is in the pro market. These are handymen, contractors and other professionals that aren’t do-it-yourselfers. It seems like a natural fit but Home Depot is just starting to really make inroads into this market. The pro customer now accounts for most revenues.
The company has developed an online site that facilitates a lot of orders. And online sales grew 23% year-over-year last quarter. Pros order supplies and usually pick them up at the stores. It’s a market that still has a lot of growth left.
A big area of expansion in this market is tool rentals. It’s estimated that 90% of pros rent tools. This area is growing like crazy. A year ago only one in 10 pros rented tools at Home Depot. Now the number has improved to one in four. And there is still a lot of room to grow.
Interest Rates and the Housing Market
But the biggest tailwind for Home Depot stock in the near term is interest rates. In 2018, HD’s stock performance lagged because interest rates rose and were expected to go still higher. But now rates have fallen and could continue to fall further. This is a big factor because lower mortgage rates give a boost to the housing market and a stronger housing market is great for business. In addition, employment is strong and wages are growing.
Meanwhile, HD stock pays a solid 2.62% yield that is well supported with a low 56.8% payout ratio and a strong track record of growth. The company has grown the payout by an average of 21.4% over the last five years.
Bottom line: unlike most retail stocks these days, there’s a lot to like about HD—whether you’re an income investor or a growth investor. Buy Home Depot stock now!
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