How Does Home Depot’s Valuation Multiple Compare to Its Peers?
Due to the high visibility of Home Depot’s (HD) earnings, we’ve opted to use a forward PE (price-to-earnings) multiple. The forward PE multiple is calculated by dividing the company’s stock price from analysts’ earnings estimate for the next four quarters.
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Home Depot’s valuation multiple
Amazon has entered the appliances sector by agreeing to sell Sears Holdings’ (SHLD) Kenmore appliances, which has made investors skeptical of Home Depot’s future earnings. They expect the deal to negatively impact the pricing power of retailers, thus affecting their profitabilities. The deal caused Home Depot stock and its valuation multiple to fall. As of August 9, 2017, Home Depot was trading at 20.1x compared to 21.1x before the announcement of its 1Q17 earnings.
As the largest home improvement retailer in the world, Home Depot enjoys higher margins and has greater growth prospects, which have allowed the company to trade at higher valuation multiple than its peers. On August 9, 2017, Lowe’s (LOW), Bed Bath & Beyond (BBBY), and Williams-Sonoma (WSM) were trading at 15.8x, 7.5x, and 12.6x, respectively.
To drive its SSSG (same-store sales growth), Home Depot has implemented enhanced delivery offerings in all its continental US stores. It’s also focusing on providing a frictionless experience to its Pro customers through the One Home Depot approach. These initiatives are expected to increase the company’s expenses. If these initiatives fail to generate the expected sales, the increased expenditures could put pressure on the company’s margins, thus lowering its earnings.
For the next four quarters, analysts are expecting Home Depot’s EPS (earnings per share) to rise 10.9%, which might have already been factored into the price of the stock. If the company posts earnings lower than analysts’ expectations, the selling pressure could lower the stock as well as the valuation multiple.
Next, we’ll see what analysts are recommending for Home Depot.