Portfolio Manager Jim Golan of William Blair & Company says Home Depot Inc (NYSE:HD) will benefit from an acceleration in new home construction, and that the company also has an opportunity to gain market share from weaker retailers.
We purchased the company several years ago, coming off of the housing bust of 2008/2009, when we viewed it as a fallen growth company. We thought the market at that time had an overly negative view of the ultimate earnings power of Home Depot.
Single-family construction, which is a major thing people look at, was down significantly, and home improvement spending on existing homes was also down fairly significantly because home values were down. If we get some reversion to the mean, Home Depot could potentially benefit at some point down the road. That has occurred over the past several years as single-family home construction has accelerated, home prices have improved, and people are spending money again.
The other thing we found interesting was the opportunity to gain market share from weaker retailers, most notably Sears (NASDAQ:SHLD), which has been struggling for the past several years, particularly in the home-appliance side, and that created an opportunity for Home Depot to take share, which they have been doing successfully. We still believe that we are below prior peak levels in terms of new home construction and also in terms of overall spending on existing homes. We think the outlook is actually fairly positive for Home Depot as we move forward.
What gives us more confidence is job growth and wages are priorities for the new administration. Jobs and growing wages are really important drivers for Home Depot. If people have jobs and their wages are growing, they are most likely going to spend money on their homes. If they do that, that’s going to help Home Depot in terms of their topline revenue growth.
We still see some opportunities to improve overall operating margins, and Home Depot throws off a lot of cash, which means they can increase the dividend and buy back stock. We have a company here in a potentially strengthening economic environment that can grow earnings over the next few years and selling at slight premium to the market on a p/e basis. We still think Home Depot has a long runway of growth and remains a fairly significant holding within our portfolio.
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