Why Home Depot Remains the Retail Sector's Best Bargain Stock

NEW YORK (TheStreet) – Home Depot (HDhas nothing left to prove.

The battle with Lowe's (LOW) for consumer's home-improvement dollars is now just a formality. Home Depot has won. From this point forward, the company only needs to maintain its leadership. The only question is what investors can gain from this victory.

Home Depot stock, at around $84, is up 1.6% on the year to date. If you're not impressed, you should be. That number is still good enough to beat the gains of 70% of the companies in the Dow Jones Industrial Average. Besides, over the past three years, Home Depot has rewarded investors with gains of more than 42%, helped by the strong rebound in the housing. And the next several years look even more promising.

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These shares are cheap. Based on next year's earnings estimates of $5.12 per share, Home Depot is the best bargain in retail. This is fitting since its slogan is "More saving. More doing." With the stock trading at around $84, these shares can be worth $90 to $95 in the next 12 months. Next year's earnings prices Home Depot at a multiple of 16, which is six points below the industry average.

Management is working quickly to cut costs and centralize the company's distribution centers. These initiatives (among others) will help Home Depot offset any near-term headwinds caused by unforeseen events -- like the winter weather that impacted store traffic.

What's more, a recent report by research company MarketLine showed how Home Depot benefited from a rebounding home improvement market between 2009 and 2013. During that span, which includes an annual growth rate (compounded) of 6.8%, that sector posted revenue of $790 billion.

Over the next four years, MarketLine predicts the home improvement market will generate revenue of about $1.1 billion. This assumes a compound annual growth rate of 6.6%.

In 2013, Home Depot posted $78.8 billion in total revenue. Assuming MarketLine's total 2013 revenue is correct, this means Home Depot accounted for 10% of all home improvement retail sales.

Home Depot is growing revenue at an annual rate of 5%. The company is projected to grow full-year 2014 revenue to $82.55 billion and that number is projected to grow to $86.22 next year. But that's annual revenue growth of just 4.7% and 4.4%, respectively. This is while MarketLine is calling for annual home improvement sales of 6.6%.

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