Home Depot (NYSE: HD) and General Electric (NYSE: GE) are two names investors will easily recognize. They are, however, in very different places today. Although the choice between buying one or the other is obvious for some investors, others will want to look very closely before making a selection, here. Which, if any, of these iconic names would fit best in your portfolio?
1. What they do …
The first thing to keep in mind is that Home Depot and General Electric have very different businesses. Home Depot is a retailer that operates nearly 2,300 hardware stores in the United States serving professional and non-professional customers. General Electric is an industrial giant, with key operations in healthcare, aviation, power, and renewable energy. Through a large ownership interest in Baker Hughes, a GE Company also reaches the oil and gas industries.
Both Home Depot and GE are cyclical stocks. Home Depot's fortunes are tight to the housing market, while GE's business is based on the general business environment. Although this point is not a win / lose issue, investors need to understand that the two companies operate in very different spaces. This seemingly simple issue could be your decision, if, for example, you have the long-term impact of the likely over-hype surrounding the so-called "retail apocalypse."
Home Depot has seen revenue and earnings grow in the past 10 years. That's not overly surprising, given that the economy has been expanding (albeit slowly) over that entire team. The period also excludes the deep 2007 to 2009 housing-led recession, which was a big headwind. So, the past decade has seen some clear tailwinds, as the economy recovered from the severe recession, supporting Home Depot's business.
The same can't be said for General Electric. Despite a steady improvement of the economy, the company is currently causing havoc in the financial space leading up to the 2007 to 2009 recession. Although it has shifted away from this business, the process has been painful and slow. Now add in the changing landscape in the power space, where GE's power turbines have seen weak demand. And also the oil and gas sector, where oil prices are still below 2014 peaks.
Simply put, General Electric has not done well over the past decade, with revenue lower than it was 10 years ago, and falling into the red lately as it continues to restructure its operations.
The future for Home Depot is likely to look like the past, at least operationally. While revenue and earnings will grow and grow over time with the economy and housing markets, it is, and intends to remain, a hardware store. It is working on its internet positioning (as is every other retailer out there), but nothing should change at Home Depot.
General Electric, on the other hand, has been going through a major overhaul, and the changes aren't nearly done yet. It has been selling assets since the 2007 to 2009 recession. It has bought some businesses along the way, too. But nothing has steadied the ship, and now, after multiple leadership changes, it's back to current assets as it looks to raise cash to support its ongoing turnaround efforts. Unless you can handle the uncertainty of owning a turnaround play, you don't want to invest in GE today.
4. Foundational differences
Home Depot and GE have changed places with regard to debt to assets over the past decade. GE's figure has fallen from the 50% to 60% range down to the mid-30% area, while Home Depot's debt-to-assets ratio has increased from the mid-20% space to roughly 55%. That's largely a function of GE trying to turn around its business by slimming down its finance arm, while Home Depot has been growing its business over time.
In fact, taking a look at how well each company covers its interest. GE, which is bleeding red ink today, does not cover its interest expenses. Meanwhile, Home Depot covers its interest expenses 15 times over. Although GE is clearly working to strengthen its financial foundation, it still has more work to do. Home Depot has been using its strong financial position and steady business wisely to expand. Of the two, Home Depot's balance sheet appears in much better shape.
5. Rewarding investors for sticking around
Home Depot has increased its dividend every year for 10 consecutive years. GE has cut its dividend multiple times and now only offers a token dividend or $ 0.04 per share per year, largely to ensure that institutional investors with a dividend mandate can still own the stock. With a yield of roughly 2.6% and a long history of dividend increases behind it, Home Depot is definitely a better pick for income investors.
That said, Home Depot's stock is also up nearly 700% over the past decade, easily besting the nearly 200% gain of the S&P 500 Index. GE's stock is down nearly 30% over that span, essentially missing out on the entire bull market run following the 2007 to 2009 recession. Clearly, Home Depot has been a much better investment overall.
6. Is there any value here?
GE's stock price performance is not surprising given its troubles, but it sets up a very different picture on the valuation front. Price to earnings is not particularly meaningful, given that the industrial giant is losing money. But price is less than half its five-year average. Price to book value and price to cash flow are roughly in line with their longer-term averages. There's still a lot of change taking shape at GE, so it's hard to make a solid call on valuation. The extremely low price-to-sales ratio at least hints at the potential upside here, but that can only happen if the company's turnaround plan plays out as hoped.
Home Depot's massive stock gains coupled with its continued operating performance have left it with what could best be described as a fair valuation. The ratio is a little above its five-year average, but not too much. P / E and price to cash flow are both a little below their longer-term averages, but not by much. (Price-to-book value is not meaningful here because the company's stockholders' equity is negative.) Yes, Home Depot's stock has done very well, but so has the company. It's not a steal, but it's not materially overpriced, either.
The easy answer here is Home Depot, assuming you have to choose between just these two stocks. The only investors who should be touching GE today are willing to take on the risks of a turnaround situation. There is huge potential, but only if it is better than it has over the past decade.
That said, Home Depot isn't a screaming buy. Yes, it's a very well-run company, but Wall Street is well aware of its success. For most, it's probably best to put Home Depot on a wish list and wait for the next economic downturn, when you'll likely be able to pick up shares on the cheap. Note that the current economic expansion is one of the longest on record. In the end, neither GE nor Home Depot look like sure winners right now.