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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This tells me that Home Depot will surprise to the upside in the next couple of years. During that span, the company should have no problem growing its market share, especially since Home Depot's main sector is forecast to grow 30% by 2018.

By then Home Depot should branch off from being just a "big box retailer" to a commerce giant. Management has taken a page out of Amazon (AMZN) and has opened new direct fulfillment centers. These facilities will be used to ship products directly to consumers who wish to shop online and pick up (or exchange) their products at the store.

This is yet one of the innovative ways Home Depot plans to simplify the shopping experience. The way I see it, the investment experience is already simple -- Home Depot is a screaming buy.

At the time of publication, the author held no position in any of the stocks mentioned.

Follow @Richard_WSPB

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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TheStreet Ratings team rates HOME DEPOT INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate HOME DEPOT INC (HD) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, impressive record of earnings per share growth, increase in net income and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • HD's revenue growth has slightly outpaced the industry average of 0.3%. Since the same quarter one year prior, revenues slightly increased by 2.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • HOME DEPOT INC has improved earnings per share by 20.5% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, HOME DEPOT INC increased its bottom line by earning $3.75 versus $3.00 in the prior year. This year, the market expects an improvement in earnings ($4.42 versus $3.75).
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Specialty Retail industry average. The net income increased by 12.5% when compared to the same quarter one year prior, going from $1,226.00 million to $1,379.00 million.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Specialty Retail industry and the overall market, HOME DEPOT INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • In its most recent trading session, HD has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.

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