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Is There More Upside to Home Depot’s Stock Price?


Feb. 6 2020, Updated 7:50 a.m. ET

Home Depot (NYSE:HD) reported its third-quarter earnings on November 19. For the quarter, the company posted a higher-than-expected adjusted EPS, while its revenue missed analysts’ expectations. Following the third-quarter earnings, the company’s management lowered its sales and SSSG (same-store sales growth) estimates for fiscal 2019 due to a delay in the realization of benefits from its “One Home Depot Strategy.” The company’s stock price fell to a low of $210.61 as of December 11, 2019, due to weak third-quarter sales and lower fiscal 2019 sales guidance.

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Since then, Home Depot stock has increased by 13.1% to trade at $238.11 as of Wednesday. Also, the company is trading at a discount of 0.5% from its 52-week high of $239.51 and at a premium of 32.6% from its 52-week low of $179.52. The company’s stock price rose due to increased home sales in December 2019 and investors’ optimism about “One Home Depot Strategy.”

Analysts’ revenue expectations for Home Depot

Home Depot’s management expects its revenue to rise by 1.8% in fiscal 2019. Meanwhile, they expect the company’s revenue to rise by 3.5%–4.0% in fiscal 2020. Analysts expect the company to report revenue of $110.3 billion in 2019, which implies growth of 1.9% from $108.2 billion in fiscal 2018. They expect the company’s revenue to rise by 4.1% to $114.8 billion in fiscal 2020.

Home Depot is investing to provide a frictionless and interconnected experience for its customers with an option for faster fulfillment. To attract more professional customers, Home Depot is working on a personalized experience through its B2B website. The company is also expanding its digital platforms to other categories like HD Home, pool, and workwear.

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During the third-quarter earnings call, the company announced that it modified 60% of its stores to improve the look and feel. Also, the company announced that more than 50% of its online sales were picked up from stores. So, to enhance the customer experience, the company rolled out automated lockers in approximately 1,300 stores by the end of the third quarter. The company is expanding its assortment to add brands that professional customers look for and also have them in job-lot quantities. All of these initiatives could drive Home Depot’s revenue.

Analysts’ EPS expectations

Notably, analysts expect Home Depot to report an adjusted EPS of $10.08 in 2019, which represents a 1.9% growth from $9.89 in fiscal 2018. Analysts expect the company’s EPS to rise by 4.7% to $10.55 in 2020. We expect higher revenue and share repurchases to drive the company’s EPS. However, the increased investment in the company’s growth initiatives, higher interest expenses, and higher effective tax rates could offset some of the gains in the EPS. In the first three quarters of 2019, the company repurchased shares worth approximately $3.9 billion. By the end of the third quarter, Home Depot had approximately $11.5 billion available under its share repurchase program.

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On November 21, Home Depot announced quarterly dividends of $1.36 per share, which represents an annualized payout rate of $5.44 per share. As of Wednesday, the company’s dividend yield was 2.31%. On the same day, Lowe’s (NYSE:LOW) and Williams-Sonoma’s (NYSE:WSM) dividend yields were 1.84% and 2.74%, respectively.

Analysts’ recommendations

Since the beginning of 2020, two analysts have increased their target price for Home Depot. On January 22, Morgan Stanley had raised its target price from $225 to $245. On January 27, Credit Sussie hiked its target price from $235 to $255.

Overall, 33 analysts cover Home Depot as of Wednesday. Among the analysts, 63.6% recommend a “buy,” 33.3% recommend a “hold,” and 3.0% recommend a “sell.” Analysts’ 12-month target price was $235.36, which implies a fall of 1.2% from its current stock price of $238.11.

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Comparing Home Depot’s stock performance with peers

After delivering strong returns of 27.1% in 2019, Home Depot has continued its upward momentum in 2020. YTD, the company has returned 9.9% as of Wednesday. During the same period, Lowe’s, Williams-Sonoma, and RH (NYSE:RH) have returned 2.0%, 1.1%, and 3.2%, respectively.

Valuation multiple

As of Wednesday, Home Depot was trading at a forward PE ratio of 22.6x compared to 20.7x at the beginning of the year. The valuation multiple rose due to the increase in the stock price. Also, the company was trading at a premium compared to its peers. Meanwhile, Lowe’s, Williams-Sonoma, and RH were trading at forward PE ratios of 18.4x, 15.0x, and 16.1x, on Wednesday, respectively.

As of Wednesday, Home Depot was trading at 22.6x analysts’ 2020 EPS estimate of $10.55 and at 20.7x analysts’ 2021 EPS estimate of $11.49. They expect the company’s EPS to rise by 4.7% in 2020 and 9.0% in 2021.


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