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How Much Upside Is Left in Home Depot Stock?

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Part 4
How Much Upside Is Left in Home Depot Stock? PART 4 OF 5

Home Depot’s Valuation Multiple Compared to Its Peers

Valuation multiple

We’ve considered forward PE (price-to-earnings) multiples for our analysis due to the high visibility of Home Depot’s (HD) earnings. A forward PE multiple can be calculated by dividing the company’s stock price by analysts’ EPS (earnings per share) estimates.

Home Depot&#8217;s Valuation Multiple Compared to Its Peers

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Home Depot’s PE multiple

Investors are expecting the recovery efforts from the devastations of Hurricanes Harvey and Irma to drive Home Depot’s sales, thus driving up its stock price and valuation multiple. As of September 11, 2017, Home Depot was trading at a forward PE multiple of 20.0x compared to 19.3x before the announcement of its 2Q17 earnings.

From the above graph, we can see that Home Depot is trading above its peers’ median value. As the largest retailer in the world, Home Depot enjoys higher margins, which has allowed the company to trade at a higher multiple than others. On the same day, peers Williams-Sonoma (WSM), Lowe’s Companies (LOW), and Bed Bath & Beyond (BBBY) were trading at 12.8x, 15.9x, and 7.0x, respectively.

Growth prospects

To drive its sales, Home Depot is focusing on the enhancement of the customer experience through interconnected online experiences and the expansion of its brand portfolio. The company is also investing in improving its supply chain through Supply Chain Sync, a multiyear, multiphase initiative. All these initiatives have increased Home Depot’s expenditures. If these initiatives fail to generate the expected sales, increased costs are expected to lower Home Depot’s earnings.

For the next four quarters, analysts are expecting Home Depot to post EPS growth of 11.8%, which could have already been factored into the company’s stock price. If the company fails to meet analysts’ estimates, selling pressure could bring down the company’s stock as well as its valuation multiple.

Next, we’ll look at analysts’ recommendations for Home Depot.

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