Home Depot Inc. (NYSE:HD) Ready for a Hurricane Bounce?
The natural disasters of September have drawn a lot of investors to Home Depot Inc (NYSE:HD) stock.
Source: Wikimedia Commons
The assumption is that rebuilding efforts will force people in Texas, Florida and Georgia into using the home warehouse chain, either directly or through their contractors, and that this will drive more profitable revenue.
It sounds reasonable, but Home Depot is already quite large, with revenues for the year ending in January of over $94 billion, growing 6% per year. For the year so far, growth is still at about 6%, with 9% of that revenue hitting the net income line.
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The speculation, which sent the shares up 6.5% in September alone, does not help the investment case, because it brings the company’s price-to-sales ratio up to almost two to one, very high for a retailer.
But the investment case is nonetheless a good one.
You Don’t Need a Hurricane
You don’t need a hurricane, or twin tropical storms, to justify buying Home Depot stock.
Since the bottom of the last recession in 2009 it’s up 537%, and it never cut the dividend during the financial crisis. The current payout of 89 cents per share represents a 2.23% yield if you buy now, and for those who bought in 2009, when the price was $27, they’re making 13% on their money even without that huge capital gain.
The problem is timing your investment. As James Brumley wrote recently, Home Depot has not gotten a “hurricane premium” in the past. Results did not spike after Hurricane Sandy hit in 2012, nor after Katrina in 2006.
Growth did not falter, either. Home Depot’s revenue growth and margin stability are boring in the best possible way. It’s now generating $10 billion in positive operating cash flow per year. That’s double what Costco Wholesale Corp (NASDAQ:COST) generates, at a similar size.
Like rival Lowe’s Companies Inc (NYSE:LOW), which is a little more than half its size, Home Depot pushes inventory toward disaster zones at the first hint of trouble, incurring costs that can hit margins. After the disasters, it makes this money back, but it tends to be a wash.
Why Buy Home Depot
The best reason to buy Home Depot is that it is a long-term holding that generates predictable returns.
Unlike almost every other retailer, Home Depot has a big moat to deploy against Amazon.Com Inc (NASDAQ:AMZN). The moat is not just the risk of getting a kitchen sink dumped on your porch, as I discovered recently. It’s Home Depot’s digital relationships with contractors and landlords, who have their own store entrances and get necessary financial hand-holding.
I discovered the Home Depot advantage with that sink. I ordered it from Home Depot online. But I learned my lesson, and it cost me nothing. I drove the sink back, ordered another, and picked a new one up from the store, getting full credit on the broken unit on the spot. I doubt that would have happened at Whole Foods.
The Bottom Line
As trade opened September 15, Home Depot stock was a bit pricier than I would like it to be. But the best investment gurus, like Warren Buffett of Berkshire Hathaway Inc (NYSE:BRK.A), teach that if you like a company you don’t worry about its current price, because you’re buying it for its price three years from now.
I made good money on my recent investment in Home Depot and have seen it do nothing but go up since I sold late last year. If you have a 10-year investment horizon, or even a five-year horizon, Home Depot is a stock you can buy with confidence.
When Home Depot falls, even in recessions, it never falls far, making this the best investment in retail, in all kinds of weather.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
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