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Why Investors Are Optimistic about Home Depot's 3Q17 Earnings

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Part 4
Why Investors Are Optimistic about Home Depot's 3Q17 Earnings PART 4 OF 5

How Home Depot’s Valuation Multiple Stacks Up against Peers

Valuation multiple

In this article, we’ll use the forward PE (price-to-earnings) multiple to value Home Depot (HD). The forward PE multiple is calculated by dividing the company’s stock price with analysts’ estimated earnings for the next four quarters.

How Home Depot&#8217;s Valuation Multiple Stacks Up against Peers

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HD’s forward PE multiple

The increased 2017 EPS guidance and the recovery efforts after the devastation caused by Hurricane Harvey and Hurricane Irma appear to have increased investors’ confidence, leading to a rise in the company’s valuation multiple. As of November 9, 2017, Home Depot was trading at a forward PE multiple of 20.16x compared to 19.89x before the announcement of 2Q17 earnings.

From the above graph, we can see that Home Depot is trading above its peers’ median valuation multiple. Being the largest retailer in the world, Home Depot enjoys higher margins than its peers. Also, Home Depot’s SSSG (same-store sales growth) was greater than its peers in the last four quarters, which has enabled the company to trade at a higher forward PE multiple than its peers. On the same day, peers Lowe’s Companies (LOW), Williams-Sonoma (WSM), and Bed Bath & Beyond (BBBY) were trading at a forward PE multiple of 15.6x, 13.0x, and 7.1x, respectively.

Growth prospects

To drive its sales, Home Depot is focusing on the enhancement of the customer experience, product innovations, and the next level of integration of Interline. The company has worked to improve its content and to take the friction out of its online process to enhance its customer experience. Also, the company is working on improving its efficiency through the implementation of Supply Chain Sync, a multiyear and multi-phase project, in all of its Rapid Deployment Centers. All these initiatives are expected to increase Home Depot’s expenses. If these initiatives fail to generate intended sales, the increased expenses could put pressure on the company’s earnings.

For the next four quarters, analysts are expecting the company to post EPS growth of 12.1%, which could have already been priced into the company’s current stock price. If Home Depot posts earnings lower than analysts’ estimates, the selling pressure can bring the company’s stock price and valuation multiple down.

Next, we’ll look at analysts’ recommendations.

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