Home Depot on the Rise

The Home Depot seems poised to break out of its recent disappointing stock performance. When you look at what the market has historically been willing to pay for HD it is selling at a noticeable discount. For example, Home Depot’s price-to-cash-flow currently is about 8.27, which is well below its historical range of 11.07-18.19. The current price-to-sales ratio is a similarly low with HD trading at .73, whereas its normal historical range is .90-1.46. Both of these valuation

measures suggest that HD is unusually inexpensive right now.

The real concern dogging retail stocks at present is that consumer spending will slow dramatically, adversely affecting retailer’s bottom-lines. However, there is no guarantee that the economy is headed for a recession and even with a slight decrease in consumer spending, Home Depot is well positioned to weather the storm. For one thing, Home Depot is a huge and diversified retailer. One of Home Depot’s biggest customers– home builders–have slowed their production greatly.  However, this business will not be down forever and many do-it-yourselfers (DIY) may opt to spend more money on home improvement projects, with the housing market in stasis for the foreseeable future. The DIY market is HD’s bread and butter and an area of increased focus for the company. HD’s 25% return-on-equity (ROE), which has been rising for the last six years, demonstrates that the company is led by an exceptional management team well able to adjust to an evolving marketplace. It may surprise you to know that while the rest of the stock market has been pummeled so far in 2008, Home Depot stock has increased 16% year-to-date.

It is easy to see that HD is cheap right now with a P/E multiple of just 12.05.  Ockham had a “buy” rating on the stock at more expensive price levels. Although the market correction may not be over, HD stock appears very attractive at its current price level for long-term investors. Given current earnings expectations for the company, we would expect to see HD trading in the range of $37 to $61 a share in a more positive stock price environment.