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How Home Depot Stock Reacted to Wells Fargo’s ‘Outperform’ Rating

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Stock performance

Home Depot (HD) stock reacted positively to Wells Fargo’s “outperform” rating, rising as high as $178.38 on April 23. The stock closed the day at $177.66, representing a 0.4% rise from the previous day’s closing price.

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Year-to-date performance

Last year was a good one for Home Depot, with its stock price rising 41.4%. However, since the beginning of 2018, the company’s stock has fallen 6.3% due to weakness in the broader equity market related to US-China trade tensions and the Syrian war. In comparison, peer stocks Lowe’s (LOW), Williams-Sonoma (WSM), and Bed Bath & Beyond (BBBY) have fallen 9.2%, 5.0%, and 21.1%, respectively, and the broader comparative S&P 500 (SPX) and the SPDR S&P Homebuilders ETF (XHB) have fallen 0.1% and 10.5%.

Valuation multiples

Due to its high visibility in Home Depot’s earnings, we have opted for the forward PE (price-to-earnings) multiple to assess its valuation. Forward PE multiples are calculated by dividing companies’ stock price by analysts’ earnings estimates for the next four quarters. As of April 23, Home Depot was trading at a forward PE multiple of 18.5x, while peers Lowe’s, Williams-Sonoma, and Bed Bath & Beyond were trading at forward PE multiples of 15.0x, 11.7x, and 7.8x, respectively.

Analysts’ estimates

In 2018, analysts expect Home Depot to post revenue of $107.8 billion, which represents 6.8% growth from the $100.9 billion it posted in 2017. Analysts expect the company’s earnings per share to rise 29.0% to $9.38 this year.

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