“From January 1, 1990 to September 11, 2019, Home Depot returned roughly 6560% versus the S&P 500 return of roughly 1760%. That’s almost 4x the return of “the market”. Household formation & home improvement is a very important theme in America.”
COMPANY PROFILE
The Home Depot is the world’s largest home improvement retailer with nearly 400,000 orange-blooded associates and more than 2,291 stores in the U.S., Canada and Mexico. The typical store today averages 105,000 square feet of indoor retail space, interconnected with an e-commerce business that offers more than one million products for the DIY customer, professional contractors, and the industry’s largest installation business for the Do-It-For-Me customer. Every time I hear about the “death of retail”, I’m reminded of the continued success of Home Depot and others. HD is a staple of every American neighborhood and the build-out of communities and housing developments couldn’t happen with Home Depot.
Style Factor Benefits
From a factor scoring perspective versus the other 199 brands in the brands index, here’s where Home Depot scores well as of 12/31/21:
89% strong price momentum
91% low vol equity
71% high FCF growth
71% low valuation via price/sales
83% strong price momentum trends
84% very low default rating
87% top mega brand, a proprietary screen - ROIC, wide moat characteristics, high sales and free cash flow
93% high ROIC over WACC (weighted cost of capital)
2/22/2022
I’m not sure there is a more stable, predictable business than Home Depot. Between being the dominant home improvement retailer of choice and the strong and sustainable thematic of “the home is our oasis” and all the efficiencies they have achieved in their business, the company just keeps chugging along. Yes, HD and other have had an epic few years and comps are high, get over it. The stock is down 7% as I type this but it’s the typical short-termism thats running rampant through the markets these days. The company is incredibly well managed, is at the center of an important theme of home improvements and home construction, and pays a 2.4% dividend that increases each year. HD has paid a dividend for 35 consecutive years and raises the dividend on a regular basis. With rates at the top of the range, the economy slowing which should pull rates back down, the housing stocks should perform well in the coming environment. Strong comps this quarter is particularly impressive given high input cost pressures everywhere, inflation that’s pushing overall consumer sentiment down to lows only seen in recessions and during the financial crisis, I’d say the company is executing incredibly well on an absolute and relative basis. That’s very valuable in times of high uncertainty. I added to the position today on the dip because stable, predictable earnings, strong balance sheets, strong thematic tailwinds and being the dominant brand in the category are worthy of buying on big dips. Management’s ability to manage through these difficult times is worthy of a premium multiple. Management is controlling expenses admirably and guiding for sales growth and comp sales to be slightly positive in 2022 with operating margins staying flat, aka they are expecting to maintain their strong pricing power. That’s exactly the kind of brand I want to own in times of turmoil. IMO management is sand-bagging the fiscal 22 guidance and will continue to outperform as they do on most occasions. Love the company, love the stock, love the dividend, love the dividend growth. There’s plenty of market share to take, they only have about 17% market share in their addressable market (per management). What if they decided to be more like Costco and take this great model overseas in a big way? BTFD
12/31/2021 Update
The stock has been a monster since its IPO. With Millennials just beginning the earning, saving and spending years, the housing sector and home improvements should continue to thrive. Investing in HD stock is not about rapid store growth anymore but it’s about the massive installed base of stores and consistent shopping by consumers, contractors and builders. HD benefits from so many trends it boggles the mind: new home construction, existing home improvements, rental improvements, trade supplies, etc. The stock is not incredibly cheap but it sure is stable and predictable and a key pillar of every community. A great dividend grower with solid same store sales growth. With the housing stock on average 40 years old, the home improvement category has some serious secular tailwinds. Fun fact: Millennials today (larger than baby boomers) are at an average age where boomers where in 1982 at the beginning of the last major economic boom. Yes, the cost of living is radically different now but demographics favor housing formation and improvements to the housing stock. The same can be said of Lowes, which we also own. Buy it every chance you can, particularly on dips.