3 Reasons Home Depot Stock Could Rise

Home-improvement retailer Home Depot has been one of the best performers in the Dow Jones Industrials in recent years, with a 33% gain over the past year easily eclipsing the Dow's flat performance during the same period. Yet even as far as Home Depot has already risen, there are reasons to believe that the stock could have further to climb if the company can keep executing as well as it has in the past. Let's take a look at three reasons why Home Depot investors should remain optimistic about the company's long-term future.

The housing market still has room to recover further Home Depot has done a good job of rebounding from the housing bust of the late 2000s, with the company having recovered all of the revenue it lost during the last recession. However, in the company's view, the housing market hasn't yet followed suit, with home prices having not yet fully rebounded to their former highs. With expectations for further home-price gains, Home Depot believes that it will keep benefiting from the wealth effect that leads homeowners to do more work on their homes when prices are rising. The company also sees an aging housing stock in the U.S. as requiring more remodeling and renovation, which could spur further business.

Home Depot also sees some demographic factors that could create even more growth opportunities. Household formation has been slow to bounce back since the recession, remaining below their historical averages for nearly a decade. The retailer believes that pent-up demand in housing among young adults could push sales activity higher in the future, and it has been working to aim beyond customers who own single-family homes to capture more of the multi-family rental business as well.

Home Depot has ambitious long-term financial expectationsOne sign of a successful company is that it's willing to set its sights high for the future. Even though Home Depot has already accomplished some impressive feats, company management has no intention of slowing down in the near future.

Earlier this month, Home Depot set out its long-term financial targets for its 2018 fiscal year. The company said that it expected compounded annual sales growth of nearly 5% over the next three years, and that works out to expected revenue of more than $100 billion by 2018. Even more importantly, Home Depot has achieved substantial success in boosting its operating margins and returns on invested capital, and the retailer thinks it can do even more on that front. From current operating margins of around 13% and return on invested capital of 27%, Home Depot expects improvement over the next three years to 14.5% and 35%, respectively. Even if it's only partially successful, the resulting earnings gains could spur further boosts for Home Depot stock.

Home Depot has maintained its competitive advantage over Lowe'sA rising housing market has helped several companies in the home-improvement space, with Lowe's being another major beneficiary. Yet Home Depot has still managed to stay ahead of Lowe's in key areas that have demonstrated Home Depot's superiority in many investors' eyes.

In its most recent quarter, for instance, Home Depot announced comparable-store sales growth of 7.3%, which was well ahead of the 5% growth in comps that Lowe's reported over the same period. Home Depot's expectations for full-year comps growth is also faster than what Lowe's set forth, reflecting a Home Depot upgrade where Lowe's was only able to reaffirm its previous guidance. Home Depot has pointed to its efforts to build out an effective e-commerce strategy, a task that many thought would be difficult to impossible given the challenges of shipping and handling for the large and heavy building materials that many look to the home-improvement retailer to supply. Online-focused fulfillment centers have been a big boon for Home Depot, and in-store pick-up options and various ways to bridge the delivery gaps from warehouse to retail store to home have led to a 25% growth rate in digital sales during the most recent quarter.

There's no guarantee that Home Depot stock will rise in the near future, even with these powerful factors supporting its long-term growth. Over the long run, though, Home Depot has demonstrated an ability to sustain solid growth, and if things play out the way the company's management hopes, then Home Depot stock could keep giving shareholders the impressive performance they've come to expect.

The article 3 Reasons Home Depot Stock Could Rise originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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