The world’s largest home improvement retailer, Home deposit (NYSE: HD), has been one of the shining stars of the pandemic recovery, generating an almost 40% return so far in 2021. But can it continue now that its stock is reaching new all-time highs?

The rise in home prices was the source of much of The Home Depot’s gains. When home values ​​soar, homeowners end up exploiting their home equity limits to improve them – and home prices soar. The latest reading of the S&P Corelogic Case-Shiller Index showed an annual home price gain of 19.7% in July.

Flush owners

The average homeowner has over $ 150,000 according to a recent report from Black Knight, a data and analytics company for the mortgage industry. All told, Americans are sitting on $ 800 billion in usable real estate equity, according to the report.

“We believe home price appreciation is fundamental support for home improvement activity and demand,” said Richard McPhail, chief financial officer of The Home Depot, on an Aug. 17 conference call. “As we look ahead, not only have we seen this appreciation in home prices, but homeowners’ balance sheets are incredibly healthy.”

When home values ​​skyrocket, homeowners end up exploiting their home’s equity limits to improve them – and not just in the DIY market. In its most recent quarter, Home Depot reported that 45% of its sales came from contractors.

Still not too expensive

Despite Home Depot’s impressive gains this year, it is trading at a lower multiple of the Standard & Poor’s 500 Index, with a 12-month price-to-earnings ratio of 26 to 28 for the S&P.

Rival Home Renovation Retailer Lowe’s (NYSE: LOW) has a PE of around 24, but it’s less profitable than Home Depot. In its last quarter, Lowe’s reported having a net margin 7.41%, compared to 10.55% for Home Depot during the comparable period.

Home Depot outperforms Lowe’s on several fronts, in part because it enjoys greater economies of scale and because it has a higher percentage of professional contractors as clients. Its net margin grew steadily every year by around 3.5% in 2009. Lowe’s also increased its net margin by about the same level in 2009, but Home Depot has proven over those years to be a more operator. profitable.

Risks to come

Risks for The Home Depot include continued inflation, commodity shortages and supply chain disruptions, as well as continued competition from the No.2 player in its market category, Lowes. But Home Depot has a broad and defensible economic divide; its size offers a low cost advantage, giving it bargaining power with suppliers, sellers, advertisers, owners and others. It is also protected against e-commerce threats, given the weight and specialization of many of its offerings.

Home Depot, of course, faces the same pandemic-era logistical disruptions as all other mass retailers, but the company has taken extraordinary steps to secure its supply chain. On its latest conference call, company executives said they had reserved container ships for their exclusive use and noted their inventory levels were 40% higher than last year. Stores remain well stocked. Larger inventory, dedicated container ships, and greater economies of scale in its retail category will likely help prepare Home Depot for any disruptive or inflationary pressures to come.

It looks like most things have gone well for The Home Depot, but the biggest risks it faces would be a housing market slowdown or a sharp drop in consumer spending. For now, the surge in house prices appears to be stabilizing. Sales of existing homes fell 2% and in September. Part of the reason is that stocks remain tight and prices remain high, excluding many potential buyers from the market, according to a report by the National Association of Realtors. The group expects the housing market to rebalance – but not fall sharply – over the next year.

But if home prices rise or consumers stop spending, home improvement projects would be pushed back into homeowners’ backgrounds, the sales they generate for Home Depot would decline, and many more bets on the stock market could. also suffer from it.

Why it’s always a buy

Home Depot is a cash cow that has consistently deployed its excess profits to increase dividends and spur share buyback plans, making its shareholders richer. Over the past five years, it has returned to shareholders the equivalent of more than 15% of its market capitalization, or $ 56 billion, in the form of dividends and share buybacks. On Home Depot’s most recent conference call, executives reiterated their commitment to continue this trend.

It’s also important to remember that the upward trend in home equity prices has a long tail. When homeowners find they have a lot of equity in what remains of a low mortgage rate environment, they ultimately turn to lenders for refinances and home equity loans. Even if home price appreciation slows, but prices remain stable near their recent highs, this trend is likely to continue for several quarters to come.

For this reason alone, investors can expect more from Home Depot. The company saw a sharp increase in sales, accelerated by the pandemic and the recovery that followed. Its next earnings report will show whether the retailer can continue to grow as the economy continues to normalize. In Home Depot’s upcoming earnings call on November 16, look at the company’s sales per square foot, which rose from $ 343 in 2011 to $ 663 in its most recent quarter, for a total increase of 58.5 % even after adjusting for inflation. If this loyal retailer continues to grow sales faster than it expands its footprint, it’s a clear sign Home Depot may continue to deliver to investors.