Did Warren Buffett Just Validate Home Depot's Strategy?

Jeremy Bowman, The Motley Fool

Thu, Nov 21, 2024, 3:05 AM 4 min read

One of Berkshire's two new purchases in the quarter was Pool Corp. (NASDAQ: POOL), a maker of swimming pool supplies and equipment, as well as related leisure products. (The other was Domino's Pizza). Buffett doesn't explain his company's stock purchases, but observers know the kinds of businesses that he favors.

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He looks for companies with sustainable competitive advantages, a straightforward business model, and an attractive valuation. Pool Corp. is the largest wholesale distributor of pool supplies, giving it an advantage in an industry where scale and proximity to the customer are key. It also operates in an attractive growth market in building supplies.

Berkshire bought 404,057 shares of Pool Corp. in the quarter, which were worth $152.2 million by the end of the third quarter. That's a small portion of Berkshire's portfolio at just 0.06%, but it signals a continuing move in the home improvement space after it bought shares of Louisiana-Pacific, a leading maker of building material, as well as homebuilders NVR and Lennar, in recent years.

A Home Depot worker in an aisle — Image source: Home Depot.

The Home Depot connection

Berkshire's purchase of Pool Corp. also seems to affirm the strategy of Home Depot (NYSE: HD), the world's biggest home improvement retailer.

Like Buffett, the company has also smelled an opportunity in building materials, which has quietly been a top-performing subsector in the stock market over the last decade. Pool Corp., for example, jumped 511% over the last decade, and Builders FirstSource is up nearly 3,000%.

Against that backdrop, Home Depot moved deeper into the industry earlier this year with its $18.25 billion acquisition of SRS Distribution, a leading distributor of building materials, including roofing, landscaping, and pool supplies. Home Depot saw SRS as a way to strengthen its business with professional contractors and get closer to those customers.

SRS gives it a network of more than 760 locations across 47 states and a fleet of 4,000 trucks. At the time, Home Depot said it expected the deal to add $50 billion to its addressable market, bringing it to approximately $1 trillion.

On the third-quarter earnings call, Home Depot said the acquisition was expected to contribute $6.4 billion just in the seven months or so that the business is part of the retailer in fiscal 2024. Management expects SRS to grow both organically and with making acquisitions, and is already capitalizing on cross-selling opportunities, including making the SRS catalog available to its pro customers. CEO Ted Decker said, "We're seeing terrific take-up on that."

Is Home Depot a buy?

Home Depot, of course, is much more than the SRS acquisition, but that move shows the company is leaning toward the pro market to separate itself further from rival Lowe's, and following the same calculus that presumedly convinced Berkshire to invest in Pool Corp.

Home Depot is still struggling with a weak housing market. The company reported a comparable-store sales (comps) decline of 1.3% in the quarter, and overall revenue rose 6.6% to $40.2 billion with the help of the SRS deal, which topped estimates at $39.3 billion. Lower gross margins and higher operating expenses contributed to earnings per share slipping from $3.85 to $3.78, which beat the consensus at $3.64.

Even as comps remain weak, Home Depot remains attractive because the housing market is expected to turn as interest rates come down. Sales of existing homes have been artificially low since the pandemic ended, and that trend will eventually turn.

When it does, Home Depot should be even better prepared to capitalize after the acquisition of SRS. And, the larger housing shortage also presents an opportunity for Home Depot (as it does for Pool Corp.) as the country needs millions of new homes, according to estimates, to rebalance the housing market.

With pent-up demand seemingly around the corner, Home Depot looks like a buy, and that's good news for Warren Buffett and Berkshire Hathaway as well.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Domino's Pizza, Home Depot, Lennar, and NVR. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy.

Did Warren Buffett Just Validate Home Depot's Strategy? was originally published by The Motley Fool

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