One company that really capitalized on the housing boom in the U.S. was Home Depot (HD). Whether you were flipping a bungalow in Sacramento, California, or building a ranch in Charlotte, North Carolina, Home Depot was probably close by to offer their wide array of home hardware. Their customer service leaves much to be desired, but they are located everywhere, the price is usually right, and they know how to keep the shelves stocked.
The company was able to grow earnings by over 20% per year in 2003, 2004, 2005, and 2006. That is a pretty good clip for any retailer. The stock actually doubled from $21 in January of 2003 to a peak of around $44 in 2005. But then something happened, perhaps the market saw what was coming ahead as the stock didn't do much of anything after early 2005. We all know what happened next as the housing bubble burst. Housing prices are in decline in many market in the U.S. and less homes are being built. Home Depot's stock has subsequently tanked down to $29. Their earnings and revenues are now in decline, as you might expect. I've watched this all play out intently, with my hesitant eye on Home Depot every since I peered at the company's financials.
Did I mention that fundamentally this company is extremely strong, and has a squeaky clean balance sheet? Home Depot has also been an amazing dividend grower since 1987. So is it time to buy this value play? Or is this a value trap? If you have a long term time horizon then you may want to give this company a second look.
- Earnings growth has been exceptional for a long time.
- Dividend growth has followed suit for a long time.
- This company has a proven history of success in retailing.
- Lowes is a strong competitor, that can't be discounted.
- The stock yields 3.1% with a low pay out ratio.
- The company has very little debt.
- They are buying back shares, like they want to go private.
- The P/E is under 12x.
- Return on Equity and Assets are both over 20%
- The pay out ratio of dividends is only 24%
- HD has a small play on China
- They have great real estate, and a decent brand.
- Americans, some day will start building, rennovating, and loving their houses again...
It is hard to find much fault with the company fundamentally. However, there is one lingering risk; they are involved in this industry that built up so much overcapacity that it collapsed upon itself. How long does it take for this growth to get humming again. Home Depot will eventually have some pretty easy prior-year comparables to go up against for earnings and revenue growth. What is the immanent catalyst short-term though? That is the clincher, as noted by S&P in their latest research report.
This stock could languish for years, how long could you stand holding a flat or declining stock.......? They are currently willing to pay you 3.1% to wait, that is more than their closest competitor...If you are a long term investor though, I'll bet that when the U.S. housing debacle becomes a distant memory, you'll be glad you picked up a few shares of this company.