The Home Depot, Inc. (HD) Is Poised for Growth

The professional business is a good growth driver and a bigger play on the housing recovery than the general consumer segment. During the recession, the professional segment had dropped at a higher pace than the consumer segment and now with housing recovery, the rise is also at a faster pace. Home Depot has taken efforts over the years to grow this business to its current size, where it accounts for around 35% of total revenue.

The company’s other focus area is customer satisfaction. It is optimizing tasks to ensure that around 60% of total employee hours are devoted to customer-facing jobs.

Competitive advantage

Home Depot’s closest rival is Lowe’s Companies, Inc. (NYSE:LOW), and it has been out-comping the latter by 400 to 500 basis points in the past few quarters. It has also taken some of market Lowe’s share through marked improvements in customer service, increased product assortment, and other smart strategies.

Lowe’s Companies, Inc. (NYSE:LOW) is in the middle of a big inventory reset initiative, and will take some time to settle down. Home Depot has two big advantages over it, which the former is trying to narrow.

Lowe’s is not as exposed to big housing markets like California; its store count of 110 in the state is less than half that of Home Depot’s. It is looking to resolve this by attempting to acquire a West Coast hardware chain called Orchard Supply Hardware and take over 60 of the latter’s 91 locations in strategic areas. Taking its cue from Home Depot, Lowe’s is also trying to broaden its professional business.

Lowe’s will eventually become a stronger rival, but until then Home Depot remains at an advantage.

Last word

Home Depot has built a solid base to capitalize on the housing recovery. It already has a geographic advantage. With a sizable portion of the business coming from professional customers, a solid product assortment, and a focus on customer satisfaction, the company should see solid growth momentum over the coming years. It’s true that the stock is not cheap as it is trading at almost 25 times its earnings, but given its future potential the valuation is justified.

The article Home Depot Is Poised for Growth originally appeared on Fool.com and is written by Eshna De.

Eshna De has no position in any stocks mentioned. The Motley Fool recommends Home Depot, Lowe’s, and Meritage Homes. Eshna is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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