HOME DEPOT:
Though the Dow Jones has rallied to a new record one of the Dow's most prominent members appears to have been left behind. At first blush the figures on Home Depot are staggering. Even after capitalizing its leases at 8X 2005 rent, Home Depot has a 28% return on capital, yet it only trades at 13X trailing 12 month earnings. How can this be?
First Home Depot is one of the most hated stocks on the stock market. Most assume that their closest competitor, Lowes, is eating their lunch. A closer look shows that their numbers are nearly identical. Lowes has lower inventory turns, yet virtually the same margins, yet less capital.
HD LOW
Days in Inventory: 77.6 80.3
Debt+Leases/EBITDAR: 1.03 .82
Gross Margins: 33.2% 34.2%
Operating Margins: 11.5% 11.2%
ROC: 27.4% 27.4%
P/E 12.55 14.81
EV+Leases/EBIT-Rent 8.07 8.96
However Home Depot's numbers include a contracting business that represents 10% of revenues. The operating margins for Home Depot's stores is 13% or nearly 200 basis points better than Lowe's!
Home Depot over the last couple of years has attempted to leverage their huge home improvement store base by buying a lot of small contractors, 23 to be exact. This industry is highly fragmented and by consolidating this industry, Home Depot stands to gain a major competitive advantage with margins much higher than that of most contractors.
Simply put, Lowe's by virtue of its size may have more opportunity for sales growth in its retail segment, but Home Depot's has the opportunity for margin expansion.
Recapitalization???
At these prices, Home Depot should be buying back shares aggressively. Lets say they borrowed $10B at 7% (4.5% after tax) to buyback roughly 273M shares lowering their share count to 1.79B shares.
Next year's average analyst estimate is at $3.18 a share, with the buyback its $3.67 a share. That would mean that Home Depot is really trading for about 10X next years earnings! No matter what you think of Home Depot 10X next years earnings for a company getting 27% ROC is cheap. Certainly it deserves to trade for more than the market multiple of 15X earnings.
By next year Home Depot's shares could be in the 50s, and could soar to the 60s or 70s if they do a large buyback.
Disclosure I do no currently own shares in HD but may buy some at anytime.
Though the Dow Jones has rallied to a new record one of the Dow's most prominent members appears to have been left behind. At first blush the figures on Home Depot are staggering. Even after capitalizing its leases at 8X 2005 rent, Home Depot has a 28% return on capital, yet it only trades at 13X trailing 12 month earnings. How can this be?
First Home Depot is one of the most hated stocks on the stock market. Most assume that their closest competitor, Lowes, is eating their lunch. A closer look shows that their numbers are nearly identical. Lowes has lower inventory turns, yet virtually the same margins, yet less capital.
HD LOW
Days in Inventory: 77.6 80.3
Debt+Leases/EBITDAR: 1.03 .82
Gross Margins: 33.2% 34.2%
Operating Margins: 11.5% 11.2%
ROC: 27.4% 27.4%
P/E 12.55 14.81
EV+Leases/EBIT-Rent 8.07 8.96
However Home Depot's numbers include a contracting business that represents 10% of revenues. The operating margins for Home Depot's stores is 13% or nearly 200 basis points better than Lowe's!
Home Depot over the last couple of years has attempted to leverage their huge home improvement store base by buying a lot of small contractors, 23 to be exact. This industry is highly fragmented and by consolidating this industry, Home Depot stands to gain a major competitive advantage with margins much higher than that of most contractors.
Simply put, Lowe's by virtue of its size may have more opportunity for sales growth in its retail segment, but Home Depot's has the opportunity for margin expansion.
Recapitalization???
At these prices, Home Depot should be buying back shares aggressively. Lets say they borrowed $10B at 7% (4.5% after tax) to buyback roughly 273M shares lowering their share count to 1.79B shares.
Next year's average analyst estimate is at $3.18 a share, with the buyback its $3.67 a share. That would mean that Home Depot is really trading for about 10X next years earnings! No matter what you think of Home Depot 10X next years earnings for a company getting 27% ROC is cheap. Certainly it deserves to trade for more than the market multiple of 15X earnings.
By next year Home Depot's shares could be in the 50s, and could soar to the 60s or 70s if they do a large buyback.
Disclosure I do no currently own shares in HD but may buy some at anytime.
posted by Roger Fritz at 9:10 PM
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