About The Home Depot

We’ve written our fair share of articles regarding American success stories.

From Sam and Bud Walton’s humble, cash-strapped days, ultimately laying the foundation for becoming the world’s largest retailer to Fred Smith receiving a “C” on a paper that outlined his initial idea for FedEx, which just happened to morph into one of the world’s largest and most relied upon shipping companies in the world, the American dream was and is alive and well if we continue innovating, especially when it’s least convenient.

The founders of Home Depot, like Sam, Bud and Fred found eventual triumph through their tinkering.

Arthur Blank and Bernard (Bernie) Marcus, the founding members of Home Depot were both fired from their jobs at formerly dominant home improvement chain, Handy Dan.

After enduring some initial uncertainty, Home Depot was founded in 1978 and Arthur and Bernie opened their first two store locations in Atlanta, Georgia, the same city the company is headquartered today.

I guess you could say Home Depot has grown a little since then.

Today, the company is considered to be the largest home improvement retailer in the world with just over 2,000 stores worldwide.

For those who aren’t the most familiar with Home Depot, we like to think of it as “the Walmart of home improvement.” The company’s massive, warehouse-style stores sell anything from slabs of wood and tools as far as the eye can see to sinks, showerheads, paint and quite literally, the list goes on and on and on and, well, you get the point.

Given that this is the case, it’s not surprising in the slightest that the company’s main competitors include Lowe’s, Menards, Harbor Freight Tools and of course, other local neighborhood chains surrounding and inside the heart of rural America.

Now that we’ve established somewhat of a foundation (Home Depot has that too) of Home Depot, what it does and its competitive landscape, now seems like an apt time to chip away at some of the company’s financials with the goal of deciphering whether or not the company’s stock is worth investing in today and for the long haul.

Home Depot’s stock financials

DId we mention that Home Depot is a huge company? 

Well, if you didn’t believe us before, believe the company’s current market capitalization of a whopping $326.3 billion.

No biggie, it just has a far larger market capitalization than that of Dollar General, Chipotle Mexican Grill and McDonald’s combined, at least, at the time of this writing.

So one could say they’re a big company.

In addition to their massive size, scale and reach, the company’s current price-to-earnings (P/E) ratio sits at 19.77, just a touch below the level which is generally considered to indicate that a company’s stock is trading at fair value (a P/E of 20), implying that Home Depot’s stock (as of this writing, trading at $320 per share) is trading at fair value, or what it’s worth paying for today.

This should make things a bit more interesting.

Finally, while we’re still mulling through some of the company’s preliminary financial metrics, we’d like to point out that Home Depot distributes to its shareholders an annual dividend of $7.60, which is massive. As a reference, Walmart, a company considerably larger (in terms of market capitalization) than Home Depot presently distributes an annual dividend of $2.24. This fact isn’t at all meant to be a dig at Walmart’s dividend, it’s just meant to act as a reference as to how large Home Depot’s is, which we’re sure is a major attraction point for current and prospective investors.

Balance sheet time!

The company’s executive team manages around $71.8 billion in total assets along with approximately $73.5 billion in total liabilities.

This is not what we initially expected but at the same time, we understand.

Companies across the board, particularly that sell merchandise of companies that manufacture their products overseas have had a rough past few years. As an example, one of Home Depot’s largest and most prominent exclusive suppliers of tools and products related thereof, Stanley Black & Decker, has seen a steady share price decline of nearly 57% over the past year’s span of time, which can mainly be attributed to supply chain-related issues, particularly inventory being tied up overseas on its way to the United States.

It’s a tough time in the tools space, to say the least.

Therefore, it is our opinion that much of Home Depot’s heightened load of debt(s) and other liabilities has been caused by the same or at least similar issues plaguing not only the home improvement industry but other sub-sectors of retail and other industries. All in all, while at first surprised by the company being a bit more liability-heavy than asset-heavy, we think it’s a problem that can and will be resolved by the company’s executive team as they (and everyone else) endures and emerges from the current recession.

Keep in mind, this might take some time.

Also, we simply view Home Depot as one of those companies that is structurally important to the United States, which gives us further confidence that it has the necessary financial support, backing and tools (pun absolutely intended) required to push through and provide for its customers and at the end of the day, its shareholders.

Onto the company’s income statement, Home Depot’s total revenue over the last five years has been growing at a very comforting rate.

Specifically, the company reported total revenue of almost $101 billion in 2018, which has risen each year between then and now, up to its most recent report of $151.1 billion in 2022 (reported on January 30). Like Walmart, sales continue to be strong even during times of turmoil, which is a great sign for both companies moving forward.

While this isn’t intended to be a “Home Depot versus Walmart” article, we think comparisons can help investors gain a better understanding of similar companies and industries and keep a better pulse on the economy overall.

From a cash flow perspective, the company’s net income over the past five years has been nothing short of astonishing (and also offers us further assurance that they’ll be able to pare down some of its outstanding liabilities over time), growing each year while being resoundingly positive, ultimately resulting in strong positive total cash from operations during the same time period.

This is exactly what we were looking for and expected from a company as large as Home Depot.

Home Depot’s stock fundamentals

Yes, we know, we’ve mentioned on many occasions that retail, for any company, is mired with low margins, a constantly changing consumer, a multitude of variable costs and most of all, stress. 

However, investors shouldn’t feel stressed regarding Home Depot’s ability to generate a trailing twelve month (TTM) net profit margin greater than that of the industry average, given that its TTM net profit margin is currently 10.87% to the industry’s 8.17%, according to TD Ameritrade’s platform. 

There isn’t much to say other than we are quite happy to know that despite all of the challenges facing the home improvement retail space, Home Depot is still coming out on top from a profitability standpoint, which even for a company with the scale of Home Depot is no small or easy task.

In the realm of returns, Home Depot does alright.

If alright is construed as indicating that the company’s TTM returns on equity, assets and investment are all substantially higher than that of the industry’s average. 

Home Depot, you’ve done it again.

An additional consideration when investing in Home Depot

Before diverting to our final verdict on Home Depot’s stock, we think it’s important to note that the company, as one has probably gathered, sells a lot of products related to the improvement of homes. Thus, we see Home Depot as being a bit more sensitive to the global housing market as opposed to Walmart as well as other dominant retailers. Namely, if the current recession deepens (which it likely will, from our eyes) and the housing market gets frothier than it already is, anyone who wants to invest in this company’s stock now must have a relatively strong stomach and view their investment in the company as one for the long haul and not a stock that you “trade”, purchasing one day and selling the next for a negligible profit, if that.

As has been pointed out from the information above, this is a quality company with some quality numbers backing it, but no company is completely immune to economic decline or worse, a complete economic meltdown.

Conviction and a long-term perspective as opposed to short-term are the necessary ingredients to being a happy and content shareholder, regardless of the quality company you’re invested in and Home Depot is no different.

Should you buy Home Depot stock?

Home Depot is an excellent company with a lot of influence and share in the home improvement space and the retail sector in general. 

The numbers simply speak for themselves and given the company’s relative strength and ability to hold its profitability edge against the competition, among many other positives, we think it’s appropriate to give the company’s stock a “buy” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.