How Home Depot Stock Reacted to UBS’s Price Target Increase

Stock performance

On June 20, Home Depot’s (HD) stock price rose to a high of $200.13 but closed the day relatively flat at $199.08 due to weakness in the global equity market. On the same day, the S&P 500 Index (SPY) was down 0.2% on fear of the escalating trade war between the US and China.

How Home Depot Stock Reacted to UBS’s Price Target Increase

In the first quarter, Home Depot had posted adjusted EPS (earnings per share) of $2.08 on revenue of $25 billion. Analysts were expecting the company to post EPS of $2.05 on revenues of $25.2 billion. Also, the company posted SSSG (same-store sales growth) of 4.2%, which was lower than analyst expectations of 5.4%. The lower-than-expected sales led the company’s stock price to as low as $184.01 on May 30.

However, since then, Home Depot stock has increased 8.2%. The rising mortgage rates and low housing inventory due to soaring lumber prices have increased the demand for existing houses, driving their values up. The increase in housing prices has prompted homeowners to renovate their houses, which has driven home improvement retailers’ sales. The expectation of an increase in sales and the measures adopted by Home Depot’s management to drive its sales have increased investor confidence, driving the company’s stock price.

Year-to-date performance

In 2017, Home Depot returned 41.4%. However, since the beginning of 2018, the company’s stock has returned just 5.0%. In comparison, Lowe’s (LOW), Williams-Sonoma (WSM), and Bed Bath & Beyond (BBBY) have returned 5.9%, 24.9%, and -7.2%, year-to-date, respectively. The SPDR S&P 500 ETF (SPY) and the SPDR S&P Homebuilders ETF (XHB) have returned 3.5% and -8.5%, respectively.

Valuation multiple

As of June 20, Home Depot was trading at a forward PE (price-to-earnings) multiple of 20.6x compared to 19.8x before the announcement of its first-quarter earnings. On the same day, Lowe’s, Williams-Sonoma, and Bed Bath & Beyond were trading at forward PE multiples of 17.3x, 15.0x, and 9.2x, respectively.