Investors Can Do It, Home Depot Can Help

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As 2012 draws to a close, I would like to focus on a leader in the home improvement store industry, Home Depot (NYSE: HD).

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Strengths:

  • Recovering Revenue: In 2008, Home Depot reported revenue of $77.3 billion; in 2012 the company announced revenue of $70.4 billion, representing -2.31% year over year annual growth; however this decay in growth is due to the historic great recession, which hit the housing sector especially hard; projections estimate 2015 revenue eclipsing 2008 revenues at $79.5 billion

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  • Dividend: Currently Home Depot pays out a quarterly dividend of $0.29, which annualized puts the dividend as yielding 1.89%
  • Institutional Vote of Confidence: 74% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Reasonable Valuation: Currently Home Depot trades with a 21.70 price to earnings ratio, a 5.27 price to book ratio, and a 1.30 price to sales ratio, all of which indicate a stock that is relatively fairly priced
  • Link to Accelerating Housing Market: Home Depot’s success is closely linked to the success of the housing market, as a large portion of their revenue is derived from building supplies; as the housing market further recovers, Home Depot should prosper

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Weakness:

  • Debt: Home Depot currently possesses around $10.8 billion of debt on their balance sheets, a major downside to the business

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  • Slim Margins: At the moment the company carries a net profit margin of 5.52%, slimmer than investors would like it to be, however better than many other retailers
  • Dependence on United States: As of the end of 2011, out of the total 2,252 stores under the Home Depot name, 1,974 were in the United States, or 87.66%; revealing a heavy dependence on the United States to perform
  • Massive Operating Expenses: Home Depot employs 331,000, and possesses a massive and growing operating expensive figure; however with expansion comes an increase in operating expenses

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Opportunities:

  • Geographical Expansion: While Home Depot is relatively established in the United States, as of the end of 2011, the company only has 7 locations in China, 91 stores in Mexico, and 180 stores in Canada, leaving plenty of room to run geographically
  • Dividend Growth: Since implementing their dividend program in 1987, Home Depot has consistently boosted their dividend payouts, and it is highly anticipated that this trend will continue into the future

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  • Capturing Market Share: Home Depot has been competing with the other home improvement chains for market share for years, and must continue this battle to maintain its leadership position in the sector
  • Natural Disasters: Hurricane Sandy inflicted incredible damage on entire communities, and while nothing can be done to bring back those lost, Home Depot benefits from these natural disasters as the rebuilding process requires products they sell
  • Online Shopping: Not only is this industry one of the fastest growing, with a U.S. Forrester Research report projecting $248.7 billion in online sales by 2014 and a compound growth rate of 10% for the coming five years, but online shopping also reduces operating costs

Threats:

  • Competition: As in any industry, Home Depot faces competition that it must battle for the consumer’s business, which can cut into revenues as each attempts to offer the best product for the lowest price
  • Government Regulation: On rare occasions the government places restrictions on certain products, which could hurt Home Depot mildly
  • Rising Prices: If the products Home Depot buys and sells were to increase in price, they would be faced with the difficult decision of either passing the extra costs onto the customer or swallowing the pain in their margins

Competition:

Major publicly traded competitors of Home Depot include Lowe’s (NYSE: LOW), Lumber Liquidators (NYSE: LL), and Amazon.com (NASDAQ: AMZN). Lowe’s is the biggest threat to Home Depot, and sells many of the same products as Home Depot. Lowe’s is valued at $39.41 billion, and pays out a dividend yielding 1.83%.

Lumber Liquidators is more focused on capturing the flooring segment of Home Depot’s business, however is a much smaller threat being valued at only $1.4 billion. While many may not think of Amazon as a competitor of Home Depot, many of the products in Home Depot can be found on Amazon.com. Additionally, the no-tax advantage Amazon has in some states poses an even bigger threat to Home Depot. Amazon is valued at $116.37 billion, however pays out no dividend.

The Foolish Bottom Line:

Home Depot appears to still be a few years away from pushing record revenues, however currently the company possesses a decently sized dividend and is a leader in the home improvement industry. Possessing only a few stores in China, Home Depot has significant room for geographical expansion, while the accelerating housing market should benefit the company.  All in all, Home Depot is a tremendous addition to any long-term portfolio, however I would wait for a pullback as the stock is pushing all-time highs currently.


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Lumber Liquidators. Motley Fool newsletter services recommend Amazon.com, The Home Depot, Lumber Liquidators, and Lowe's Companies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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