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Home Depot: Building on Success

Home Depot (HD) is one of those incredible investment success stories everyone wishes they had gotten into years ago. If you had invested $1,000 in Home Depot exactly 20 years ago, for example, you'd have more than $107,000 today. And that's without buying any more shares.

But even with such a raging success story behind it, Bill Nygren, manager of Oakmark fund (OAKMX), thinks Home Depot can still reward investors today. Home Depot, he says, is a premium company. And right now, it's selling at an average valuation. The stock recently traded at 16 times 2005 consensus earnings estimates of $2.56 per share. That's in-line with the S&P 500, but a far cry from its average annual P/E ratio of 28 over the past decade.

Home Depot is the largest holding in Masters' Select Value (MSVFX), a fund Nygren co-manages with three other managers. (See Best Supporting Actors to learn more about this top-notch fund.)

The world's largest home improvement chain and second-largest retailer (after Wal-Mart) built its success on the booming do-it-yourself market. Now, with nearly 1,900 stores selling 50,000 different items, Home Depot is looking for new ways to maintain growth and hold onto its leading position.

One approach is to capitalize on a new trend -- the "do-it-for-me" market. Home Depot recently acquired a construction supply company to tap into professional contractor markets. The unit is now expanding into Canada and Mexico where there is greater opportunity for growth. The move should help sustain Home Depot's profits as interest rates rise and put a squeeze on the home-building supply industry.

Value Line awards Home Depot its highest ranking for timeliness, suggesting both short-term and long-term investors give it a look. And more than half the analysts closely covering the stock rate Home Depot a "buy" or "strong buy."

Analysts have set a median 12-month price target of $48, an upside of 18% from its recent price. Profits are expected to grow at double-digit rates over the next three to five years, according to Thomson First Call.

--Erin Burt

Home Depot Click for larger chart Today's quote Use Stock Finder to make your own stock picks Last closing price: $27.18 200-day moving av.: $25 3-yr. annual return: -8% Trailing 12 mo. P/E: 20 Forward P/E: 17 Price-to-book ratio: 2 Price-to-sales ratio: 11.10 5-yr earnings growth: -11% PEG ratio: 0.00 More