Due to the high visibility of Home Depot’s (HD) earnings, we’ve opted for the forward PE (price-to-earnings) multiple. A forward PE multiple is calculated by dividing a company’s current stock price by analysts’ earnings estimate for the next four quarters.
Home Depot’s forward PE multiple
As of February 21, 2018, Home Depot was trading at a forward PE multiple of 20.2x. That same day, Lowe’s (LOW), Williams-Sonoma (WSM), and Bed Bath & Beyond (BBBY) were trading at forward PE multiples of 16.3x, 13.0x, and 7.9x, respectively. Home Depot, the largest home improvement retailer in the world, enjoys higher margins than its peers. Higher margins and strong SSSG have allowed the company to trade at a higher valuation multiple than its peers.
To drive SSSG, Home Depot is focusing on the expansion of its supply chain and the implementation of technological advancements. These initiatives could raise the company’s expenditures. If these initiatives fail to generate expected sales, the increased spending could put pressure on the company’s earnings.
For the next four quarters, analysts are expecting Home Depot’s EPS to rise 25.1%, which could have already been factored into the company’s current stock price. If the company posts earnings lower than analysts’ estimates, selling pressure could bring down the price of the stock and its selling pressure.
Next, we’ll look at analysts’ recommendations for Home Depot.