Warren Buffet's Recent Endorsement Lends Credence to Home Depot's Approach
Warren Buffett's Berkshire Hathaway (BRK.A -0.13%, BRK.B -0.16%) recently disclosed its stock transactions for the third quarter, revealing minimal buying activity during this period.
Two new investments emerged from Berkshire in the third quarter. One of these was Pool Corp. (POOL -1.78%), a prominent manufacturer of swimming pool supplies and equipment, along with associated recreational goods. The other notable acquisition was Domino's Pizza.
Buffett has a reputation for being tight-lipped about his investment decisions, but it's widely understood that he favors businesses boasting resilient competitive advantages, straightforward operations, and attractive valuations. Pool Corp., as the primary wholesale distributor of pool supplies, enjoys an advantage in an industry where scale and proximity to consumers are paramount. Additionally, it operates within a thriving growth sector in construction materials.
In the third quarter, Berkshire scooped up 404,057 shares of Pool Corp., resulting in a value of $152.2 million at the end of the period. This represents a mere 0.06% of Berkshire's extensive portfolio, but it signifies a continuing interest in the home improvement sector, following previous investments in building material stalwart Louisiana-Pacific and homebuilders NVR and Lennar.
The Connection to Home Depot
Berkshire's acquisition of Pool Corp. seems to align with the strategy of Home Depot (HD 0.62%), the world's foremost home improvement retailer.
Like Buffett, Home Depot has identified lucrative potential in the construction materials sector, which has consistently delivered impressive returns in the stock market over the past decade. Pool Corp., for instance, has increased by 511% over the past decade, with Builders FirstSource posting a nearly 3000% hike.
In light of this, Home Depot bolstered its presence within the industry earlier this year via its acquisition of SRS Distribution, a leading supplier of building materials, encompassing roofing, landscaping, and pool supplies. Home Depot viewed SRS as a strategic move to boost its presence amongst professional contractors and enhance its rapport with these clients.
The SRS acquisition granted Home Depot access to over 760 locations across 47 states and a fleet of 4,000 vehicles. At the time, Home Depot anticipated that the acquisition would broaden its addressable market from $950 billion to roughly $1 trillion.
On the third-quarter earnings call, Home Depot stated that the acquisition was expected to generate $6.4 billion by the end of fiscal 2024, within its first seven months as part of the retail giant. Management expects SRS to grow both organically and through additional acquisitions, with cross-selling opportunities like making the SRS catalog available to pro customers already being capitalized on. CEO Ted Decker expressed satisfaction with this initiative, stating, "We're seeing fantastic response to it."
Is Home Depot an attractive investment?
Although Home Depot is more than just the SRS acquisition, its strategic move towards the pro market sets it apart from its main competitor, Lowe's.
Home Depot continues to grapple with a suboptimal housing market. The company reported a 1.3% decrease in comparable-store sales (comps) in the third quarter, with overall revenue increasing by 6.6% to $40.2 billion, thanks to the SRS deal, which surpassed expectations at $39.3 billion. Reduced gross margins and increased operational expenditure led to a slump in earnings per share from $3.85 to $3.78, but this figure still exceeded the consensus forecast of $3.64.
Despite the ongoing sluggishness in comps, Home Depot remains an attractive prospect, given the anticipated recovery in the housing market as interest rates decrease. The sales of existing homes have exhibited a prolonged decline since the pandemic came to an end, but this trend is expected to reverse eventually.
When that occurs, Home Depot should be better positioned to capitalize on the occasion, thanks to the SRS acquisition. Furthermore, the larger housing deficit also provides ample opportunities for Home Depot (as well as Pool Corp.), as the country requires approximately 3 million new homes, according to estimates, to restore balance in the housing market.
With mounting demand seemingly on the horizon, Home Depot appears to be a strategic investment, and this is welcome news for Warren Buffett and Berkshire Hathaway as well.
Buffet's investment in Pool Corp., a Pool supply manufacturer, indicates his interest in the home improvement sector, following previous investments in Louisiana-Pacific and homebuilders NVR and Lennar. This strategy seems to align with Home Depot's acquisition of SRS Distribution, a leading supplier of building materials, to boost its presence in the pro market.
Given Buffett's interest in Home Depot's strategy and the anticipated recovery in the housing market, Home Depot could be an attractive investment for Berkshire Hathaway.
