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Why Home Depot and Other Home Improvement Stocks Dove in April

Phalguni Soni

Can Home Depot Build On Its Record-Breaking Results in 1Q16?

(Continued from Prior Part)

Home Depot’s (HD) stock performance

Home Depot’s (HD) stock has clocked 49.6% in total returns over the last 12 months. The stock is up 7.9% this year, to $113.35 on May 15. Although the stock paid a dividend of $1.88 per share in fiscal 2015, most of the return came through stock price appreciation. HD’s dividend yield in fiscal 2015 averaged 1.8%. In contrast, the company’s main rival, Lowe’s, has returned 63.7% over the last 12 months.

Valuations

Home Depot (HD), Lowe’s (LOW), and Williams-Sonoma’s (WSM) valuations are trading at almost the same levels in terms of forward earnings. Home Depot is valued at a price-to-earnings (or PE) multiple of 21.7x forward earnings, which is slightly lower than Lowe’s at 22.1x and Williams-Sonoma at 21.9x.

Lowe’s has provided slightly higher growth rates in store comps in fiscal 2016  compared to Home Depot. This outperformance might account for the differences in valuation  between the top two players in the home improvement retail industry .

Restoration Hardware (RH), at a PE of 29.4x, is the costliest stock in HD’s peer group. It’s a smaller and newer player, and Restoration Hardware’s historical growth rates are way higher than its peers’. RH’s pricier product assortment ensures that its revenue per retail square foot is also much higher than competitors’, at over $3,300 compared to $352 for Home Depot and $280 for Lowe’s.

Index comparisons

Home Depot’s valuations are higher than comparative indices, though. The S&P 500 Index (SPY)(IVV)(VOO) traded at a PE of 18.0x, the Dow Jones Industrial Average (DIA) traded at a PE of 16.4x, and the S&P 500 Consumer Discretionary Sector Index (XLY)(RXI) traded at a PE of 20.1x.

Recent price trends

Since HD’s last earnings release on February 24, the stock is down 2.9%. The sales performance of Home Depot and its competitors is closely tied to the overall economy’s performance . Home improvement retailers’ stock prices took a dive in April, as GDP growth in the first quarter of 2015, housing market indicators, and construction spending disappointed.

However, prices have recovered somewhat since then. Find out more in the next article of this series.

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