A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that operates warehouse-style home-improvement stores, spread across North American and each carrying 30,000 to 40,000 items instore.

Pat likes the company’s plans to cut down on delivery times for online orders throughout the U.S. Its rising sales and earnings, and strong balance sheet are also attractive—as are its plans to double its share repurchase. Still, says Pat, its outlook depends on steady U.S. housing market.

Q: Pat: Could I get your view on Home Depot—whether this is a good buy and why? Thanks.

Home Depot Inc. (Symbol HD on New York; www.homedepot.com), operates warehouse-style home-improvement stores that average 104,000 square feet, plus an additional 24,000 square-foot garden centre. Each outlet typically carries 30,000 to 40,000 items.

The company has 2,286 stores with locations in every state of the U.S., 10 Canadian provinces, Mexico, Puerto Rico, the U.S. Virgin Islands, and Guam.

Home Depot’s sales have risen steadily over the last five years—up 28.0% from $78.8 billion in 2014 to $100.9 billion in 2018 (fiscal years end January 31). Earnings have also risen steadily—up 64.0%, from $5.4 billion in 2013 to $8.8 billion in 2018. As the result of share buybacks, per-share earnings rose 98.4% over the same five years, from $3.76 to $7.46 on fewer shares outstanding.

The company plans to spend $1.2 billion over the next five years to speed up delivery of goods to homes and job sites as online shopping continues to expand. It plans to add 70 distribution facilities across the U.S. so that it is capable of reaching 90% of the addresses in the U.S. in one day or less. The expansion should also help the company offset rising transportation costs and improve its inventory management.

Online orders accounted for a modest 6.7% of Home Depot’s sales in fiscal 2018, but those digital revenues were up 21% from 2017. Still, about 45% of online orders are picked up inside stores, so the company continues to invest in self-service lockers for the front of some locations. That helps to speed up order retrieval.

Value Stocks: Sales and earnings are up despite stiff competition

In the latest quarter, ended October 28, 2018, Home Depot’s sales rose 5.1%, to $26.3 billion from $25.0 billion a year earlier. Total customer transactions increased 1.4%, to 394.8 million from 389.5 million from the previous year; the average sale per transaction rose 3.6%, to $65.11 from $62.84. Same store sales were up 4.8%.

Earnings improved 32.4%, to $2.9 billion from $2.2 billion, while per-share earnings improved 36.4%, to $2.51 from $1.84, on fewer shares outstanding.

The company ended the quarter with cash of $1.8 billion. Its long-term debt of $23.3 billion is a low 11.3% of its market cap.

Home Depot faces strong competition from discount retailers Walmart and Costco. Competition for smaller items, such as cleaning supplies and light bulbs, is especially fierce. It also needs housing markets to remain steady despite rising interest rates and material cost (partially due to tariffs).

Still, the company continues to successfully invest in expanding its selling channels, including digital, and improving its customer service. It also continues to attract more professional customers (tradespeople). In addition, a sound U.S. economy—supported by rising wages, a strong labour market, and rebuilding efforts in the wake of recent natural disasters—is a big positive.

Home Depot’s stock trades at 19.1 times its 2019 forecast earnings of $9.75 per share. The company has also doubled the amount of funds for share buybacks for 2019 to $8 billion from $4 billion in 2018. This will work to increase per-share earnings and should help its share price. The stock now yields 2.2%.

Recommendation in the Inner Circle: Home Depot is okay to hold.