Should You Pick Home Depot Stock Over Procter & Gamble?

We believe that Home Depot stock (NYSE: HD) is currently a better pick over Procter & Gamble stock (NYSE: PG), given its better prospects. Although Home Depot is a consumer cyclical and P&G is a consumer defensive company, we compare them due to their similar operating income of $20-$22 billion over the last twelve months. The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. Since these stocks are from different sectors, comparing P/S against one another may not be helpful. We compare their current multiples with the historical ones in the sections below to better understand their valuations. In the following sections, we discuss why we believe Home Depot will offer higher returns than P&G in the next three years. We compare a slew of factors, such as historical revenue growth, stock returns, and valuation, in an interactive dashboard analysis of Procter & Gamble vs. Home Depot: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. HD Stock Has Fared Better Than PG

PG stock has witnessed gains of 20% from levels of $140 in early January 2021 to around $165 now, while HD stock has shown gains of 30% from levels of $265 to around $340 over this period. This compares with an increase of about 40% for the S&P 500 over this roughly three-year period.

However, the increase in PG and HD stocks has been far from consistent. Returns for PG stock were 18% in 2021, -7% in 2022, and -3% in 2023, while that for HD stock were 56%, -24%, and 10%, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that PG underperformed the S&P in 2021 and 2023 and HD underperformed the S&P in 2022 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for other heavyweights in the Consumer Staples sector including WMT, COST, and KO, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could PG and HD face a similar situation as they did in 2023 and underperform the S&P over the next 12 months — or will they see a strong jump? We don’t expect any meaningful growth in either of the stocks. That said, we think HD will fare better than PG in the next three years.

2. Both Companies Have Seen Similar Revenue Growth

P&G has seen its revenue rise at an average annual growth rate of 5% in the last three years, aligning with the 5.2% for Home Depot. However, if we look at the last twelve months, P&G’s 3.8% revenue growth fares better than -3% for Home Depot.

P&G’s largest segment is Fabric & Home Care, contributing around 35% of the company’s revenues. It has also seen a steady rise in sales over recent years. However, it has lately seen its top-line expansion led by pricing gains over volume growth. The company reported a 3.3% rise in total sales for the nine-month period ending March 2024, driven by a 5% growth in pricing, partly offset by a 1% forex translation while volume remained flat.

Looking at Home Depot, it benefited during the pandemic, with homeowners spending substantially more time in their homes during that period. There was an increase in remote working, which allowed the company to serve those customers looking to build and maintain a home office beyond the pandemic as well.

The sales continued to rise, albeit at a slower rate, as the economy recovered from the impact of the pandemic. Consequently, Home Depot’s revenue reached $157.4 billion in fiscal 2023 (fiscal ends in January), before falling slightly to $152.7 billion in fiscal 2024, amid lower demand. Lately, consumer spending has shifted more to services instead of goods, along with pressure in certain big-ticket discretionary categories. The company recently reported its Q1 results, with total sales falling 2.3% y-o-y to $36.4 billion.

Our Procter & Gamble Revenue Comparison and Home Depot Revenue Comparison dashboards provide more insight into the companies’ sales. Looking forward, we think both companies will see their top-line expand at an average annual rate in the low single-digits, due to a weakening consumer demand environment, while pricing gains may continue to aid the sales growth.

3. P&G Is More Profitable And Offers Lower Financial Risk

P&G’s operating margin of 22.1% in fiscal 2023 aligns with the level seen in fiscal 2020, while Home Depot’s operating margin has expanded from 13.8% in fiscal 2021 to 14.2% in fiscal 2024. Looking at the last twelve-month period, P&G’s operating margin of 24% fares better than 14% for Home Depot.

Looking at financial risk, P&G fares better with its 9% debt as a percentage of equity lower than 15% for Home Depot and its 7% cash as a percentage of assets higher than 5% for the latter. This implies that P&G has a slightly better debt position and more cash cushion.

4. The Net of It All

We see that P&G is more profitable and has a better financial position. To some extent, this also explains its higher P/S multiple of 4.7x revenues, compared to 2.2x for Home Depot.

Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Home Depot is the better choice of the two. If we compare the current valuation multiples to the historical averages, Home Depot fares better, with its stock currently trading at 2.2x revenues vs. the last five-year average of 2.4x. In contrast, P&G stock trades at 4.4x revenues vs. its last five-year average of 4.3x. Our Procter & Gamble Valuation Ratios Comparison and Home Depot’s Valuation Ratios Comparison offer more details.

The table below summarizes our revenue and return expectations for both companies over the next three years. It points to an expected return of 1% for P&G over this period, vs. a 10% expected return for Home Depot. These numbers are based on Trefis Machine Learning analysis – Procter & Gamble vs. Home Depot – which also provides more details on how we arrive at these figures.

While HD may outperform PG in the next three years, it is helpful to see how Procter & Gamble’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 5/15/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates