The peak holiday retailing period is behind us, which makes it an ideal time for investors to do some shopping of their own. Specifically, those businesses that stood out by posting market-thumping operating results during that period might make great buys today.
Below, Motley Fool investors offer three attractive options in the retailing sector. Home Depot (NYSE: HD), Dollar Tree (NASDAQ: DLTR), and Walmart (NYSE: WMT) each bring good qualities like sales growth and income gains. Their prices seem right, too, given their potential for earnings growth over the next few years.
Staying close to home
Demitri Kalogeropoulos (Home Depot): The rebound in the cyclical housing market is stretching into its eighth year, but that doesn’t mean it’s too late to buy industry leader Home Depot. The company is coming off a banner 2017 that was highlighted by accelerating revenue gains, rising profitability, and a big hike to its dividend as it passed $100 billion in annual sales for the first time.
Image source: Getty Images.
Rising interest rates, and the lack of another crop of destructive hurricanes, might temper some of those results for the year ahead. Yet Home Depot still expects healthy industry growth in 2018. Comparable-store sales should rise by 5%, management says, as home price appreciation continues spurring remodeling demand despite higher mortgage rates.
The retailer’s financial metrics are even more attractive. Operating margin is slated to rise to as high as 15% of sales, compared to rival Lowe’s 10%, and return on invested capital is on pace to pass an incredible 40% by 2020. Investors have responded to that performance gap by sending Home Depot shares up 56% since early 2015, compared to an 18% increase for Lowe’s. The retailer continues to demonstrate why it deserves that premium, though, by trouncing rivals — both in and outside of the industry — on key growth and profitability metrics.
Check out the discount bin
Rich Duprey (Dollar Tree): Nothing like a market overreaction to create a buying opportunity, and Wall Street’s pounding of deep discount chain Dollar Tree should make this a great opportunity to buy this top retail name.
Dollar Tree was hammered because it missed analyst expectations for fourth-quarter results and disappointing guidance. Sales rose 13% to $6.36 billion on a 2.4% increase in comparable-store sales. That slightly missed Wall Street’s estimates of $6.4 billion, and its adjusted earnings of $1.89 per share was a penny lower than what analysts forecast. Part of its problem is the continued drag Family Dollar places on results, which recorded a 1% increase in comps compared to Dollar Tree’s namesake stores, which saw a 3.8% rise.
I was never a fan of the merger because it changed Dollar Tree from a pure-play dollar store to one that had a mix of price points, although most were around $5 or less. Still, integrating the two different cultures has not been smooth.
Regardless, Dollar Tree remains an excellent investment because the deep discount retail market in the $5 and below price range remains the sweet spot of retail. It’s why Dollar General and Five Below continue to do well, and if you look at Dollar Tree’s full-year guidance for 2018, it was above consensus estimates on both revenues and earnings.
Dollar Tree now trades at less than its sales, and its enterprise value goes for a discount as deep as the products it sells when compared to the free cash flow it produces. An EV-to-FCF of 10 makes the retailer a bargain-basement stock and a perfect retail stock to buy now.
An undeserved sell-off
Jeremy Bowman (Walmart): Buying the dip is a classic investing strategy, and a post-earnings sell-off is often a great time to do it. Walmart offers one such opportunity.
Image source: Getty Images.
Shares of the retail giant took a beating last month on its earnings report as e-commerce sales growth suddenly slowed and the company reported a lower profit than expected. The stock fell 10% that day and has continued to slide since then, now down 20% from a high in January, but investors overlooked some impressive numbers in the sell-off. For instance, the company had its best two-year comparable sales growth in eight years, at 4.4%, which shows that Walmart is still executing effectively.
Management explained that e-commerce growth slowed down as it lapped its acquisition of Jet.com from a year ago, but it held its online sales growth guidance at 40% for the current year as it plans to double the number of online grocery pickup stations it has to 2,000. The grocery pickup program has been the biggest driver of the company’s e-commerce growth in recent years.
CEO Doug McMillon has also earned investors’ trust after successfully navigating the company through a turnaround that involved sacrificing profits to raise wages, invest in stores, and acquire Jet.com and smaller e-commerce businesses. The company sees earnings per share of $4.75 to $5.00 for the current year, up from $4.42 in fiscal 2018, giving the stock a reasonable valuation and a divided yield of 2.4%. If the company can execute on its guidance for the year, which it should be able to do, the stock should return to its previous heights.
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Demitrios Kalogeropoulos owns shares of Home Depot. Jeremy Bowman has no position in any of the stocks mentioned. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has the following options: short May 2018 $175 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Five Below, Home Depot, and Lowe’s. The Motley Fool has a disclosure policy.