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Home Depot: Do Analysts Expect Continued Momentum?

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Home Depot (HD) stock has surged 37.8% so far this year. The stock is ahead of its closest rival Lowe’s (LOW) and the broader S&P 500, which have risen about 21% and 20%, respectively, year-to-date.

The home improvement retailer’s stock has risen about 14% since it announced its second-quarter results in August. Its second-quarter sales lagged analysts’ forecast. However, it beat earnings expectations.

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Management’s outlook and recent performance

Home Depot’s second-quarter sales grew 1.2% to $30.8 billion. It lagged analysts’ estimate of $31.0 billion. The company’s same-store sales grew 3%. It delivered strong comparable sales in categories such as appliances, tools, décor and storage, indoor garden, paint, building materials, hardware, plumbing, and outdoor garden. However, the company’s comparable lumber sales fell in the high single digits due to commodity price inflation. Lowe’s second-quarter sales grew 0.5% to $20.99 billion.

Home Depot’s second-quarter adjusted EPS of $3.17 were significantly higher than analysts’ estimate of $3.08. The company’s adjusted EPS rose 3.9% year-over-year. Following its second-quarter results, Home Depot trimmed its sales outlook but reaffirmed its earnings forecast. It expects its 2019 sales to rise about 2.3% and its same-store sales to increase 4%. The company had earlier expected sales growth of 3.3% and same-store sales growth of about 5%. Home Depot expects its 2019 EPS to rise 3.1% to $10.03.

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Valuation and analysts’ expectations

As of October 21, Home Depot stock was trading at a 12-month forward PE multiple of 22.1x. Rival Lowe’s is trading at a valuation multiple of 17.6x. Analysts expect Home Depot’s 2019 sales and adjusted EPS to rise 2.4% and 2.5%, respectively. They expect its sales and adjusted EPS to grow 4.4% and 8.1%, respectively, in 2020.

Analysts expect Lowe’s sales to grow 1.8% in 2019 and 3.4% in 2020. They expect its adjusted EPS to rise 11.2% in 2019 and 17.5% in 2020.

Home Depot is refining its merchandise assortments and upgrading its stores to enhance the consumer shopping experience. The retailer is also investing in the enhancement of its online channel. Its second-quarter online sales rose 20%. Its pick-up facility for online orders is helping to increase store traffic. About 50% of its US online orders were collected from physical stores in the second quarter. The company’s strategic initiatives are expected to strengthen its omni-channel capabilities and drive its top line growth.

Home Depot is also focusing on its professional customer business. It’s trying to improve the Pro business by enhancing customer engagement through its tool rental facility, delivery services, and online business-to-business experience.

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Will Home Depot stock rise further?

Home Depot trimmed its full-year sales outlook in August owing to tariff concerns and lumber price deflation. On September 17, Guggenheim lowered its rating on HD to “neutral” from “buy.” Guggenheim is concerned about the impact of the company’s strategic investments on its margin.

In February, Home Depot announced a 32% hike in its quarterly dividend per share to $1.36. As of October 21, Home Depot’s dividend yield was 2.3% compared to Lowe’s 2%. The company also plans to make share repurchases worth $5 billion in 2019, including a share repurchase worth $1.25 billion it made in the second quarter.

As of October 21, Home Depot stock carried a “buy” recommendation from 20 out of 33 analysts. The stock had “hold” ratings from 12 analysts, while one analyst had a “sell” recommendation. Currently, analysts’ average price estimate of $231.67 implies a potential downside of 2% in Home Depot stock over the next 12 months.

In comparison, the 12-month price target of $122 for Lowe’s stock reflects a 9% upside potential.

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