Home Depot Wants a HUG

Good news today. Home Depot (HD), one of our Buy List stocks, is buying Hughes Supplies (HUG) for $3.2 billion. Hughes is a neat little company. They’re involved in the wholesale construction supplies biz. This is one of those industries you never think about, but it’s actually very profitable. HD has been slowly dipping its toes in the water in this area. They bought out a couple of businesses last year, but this HUG purchase is the company’s largest acquisition ever.
I really can’t say that this move is much of a surprise. It was only a matter of time. The sector is rapidly consolidating, and in November Hughes said that it was considering “strategic alternatives.” (Hint, hint.) Also, Stephen D. Simpson at the Motley Fool, noticed that in the 8-K report, eighteen senior veeps and higher were set to get cash upon a buyout. So someone was planning ahead.
Home Depot is offering $46.50 a share for Hughes. Yesterday, HUG closed at $38.55, so that’s a pretty nice premium. Right now, Home Depot’s stock is up so Wall Street is pleased. I’m also happy to see that the acquisition should add a few pennies a share to Home Depot’s bottom line this year.
I think it’s interesting that Home Depot it working to build up its other businesses. The old story was that the stock would follow the housing market. I just don’t buy that. The company’s supply division accounts for about 4% of HD’s total revenue. Hughes will probably double that. As successful as Hughes has been, the company still only has about 2% of the wholesale construction market. There’s plenty of room to grow.
I was a huge fan of Lowe’s (LOW) for years (and I still am), but the gap between Lowe’s and Home Depot got to be too wide. I expect to see Home Depot back above $50 a share later this year. This is a great way for HD to start off 2006.
Here’s a chart of Hughes going back to 1992:
HUG.bmp

Posted by on January 10th, 2006 at 1:11 pm


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