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Comparing the Valuation Multiples of Home Improvement Companies

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Oct. 4 2018, Updated 3:45 p.m. ET

Valuation multiples

Of all the available valuation multiples, we’ve opted for the forward PE multiple due to the high visibility of home improvement companies’ earnings. A forward PE multiple is computed by dividing a company’s stock price by analysts’ earnings’ estimates for the next four quarters.

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Forward PE multiple

From the above graph, you can see that Home Depot (HD) is trading at a premium compared to its peers. As the world’s largest home improvement retailer, Home Depot enjoys a higher margin, which, along with strong SSSG (same-store sales growth), has allowed the company to trade at a higher forward PE multiple of 20.3x as of October 3.

Home Depot is followed by Lowe’s (LOW) with a forward PE multiple of 19.5x. The surge in LOW stock due to optimism surrounding CEO Marvin Ellison’s turnaround initiatives has increased Lowe’s forward PE multiple since the beginning of 2018.

Lowe’s is followed by RH (RH) with a forward PE multiple of 15.1x. On October 3, Williams-Sonoma (WSM) was trading at a forward PE multiple of 14.2x. The surge in WSM stock due to strong first- and second-quarter results led to a rise in its valuation multiple. At the beginning of 2018, it was trading at a forward PE multiple of 13.8x.

Declining margins and negative SSSG have led to a fall in Bed Bath & Beyond (BBBY) stock and its valuation multiple. On October 3, BBBY was trading at 7.8x compared to 8.1x at the beginning of 2018.

Next, we’ll take a look at analyst recommendations.

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