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Barron's Believes Home Depot's Rally Will Continue

May 02, 2015 | About:

Home Depot's (HD) stock price has seen a good run over the past year. The company's stock has gained over 38%, significantly outperforming the S&P 500. A big question in the mind of investors today is whether they should buy the company after the recent run up. According to Barron's, the answer is yes. Barron’s Avi Salzman believes that there is still significant upside to stock given several multiyear sales drivers like continued recovery in housing market, rising renovation demand, and the company’s focus on the lucrative professional and high-end markets.

Most of the sell side analyst appears to agree with Salzman. Out of 30 analysts covering the stock, 18 are positive and have buy ratings while 12 have hold ratings. None of the analysts covering the stock has a sell rating. The company has seen a lot of positive commentary from analysts over the last couple of months. Barclays and RBC Capital assigned a Buy rating to Home Depot in January. The company received another Buy rating in February from RBC Capital analyst Scot Ciccarelli. Citi and Jefferies analysts also raised their price target on the company in February. According to Citi analyst Kate McShane, buyback flexibility should provide support to the company's EPS target, and Home Depot's EPS guidance is conservative given buyback assumptions. In her report she noted,

"We are raising our target price to $133, which equates to 22x our FY17 EPS estimate. Over the past three years, HD has traded at a forward multiple ranging from 16x to 25x and averaging around 20x. We think HD deserves to trade at a premium based on upside from the likelihood of greater than guided return of capital and a likely conservative benefit from U.S. Housing."

Jefferies' Daniel Binder, who has a price target of $135 a share, also believes that "the (company's) guidance seems low."

Home Depot continues to see broad based growth across all its geographies. Last quarter, the company's three U.S divisions exceeded their sales plan and all 19 regions saw mid-single digit comp growth or better. The company's sales were aided by a strong response to its holiday décor, gift center as well as its Black Friday events during the quarter. It's online business also posted strong performance and grew over $1 billion (up 36% from year ago period).

Internationally, both of the company's Mexican and Canadian businesses posted positive comps in local currency for the quarter, making it 45 and 13 quarters in a row for positive comps, respectively. The company also completed the acquisition of HD supply hardware solutions, formerly known as Crown Bolt, in the fourth quarter. Overall, 2014 was a record year for the company both in terms of revenues and margins.

Going forward, continued tailwind from housing recovery and GDP growth will help the company in 2015. The company is expecting comparative sales growth of ~4.5% in the US and between 3.3% to 4.5% internationally. In addition, the company is also planning to open six new stores and expand the operating margins by 60 basis points. The company's board also announced a 26% increase in its quarterly dividend of $0.59 per share and authorized a new share repurchase program of $18 billion.

Home Depot is trading at 21 times FY2015 EPS. According to sell side estimates, the company’s EPS is expected to grow 14.19% in the current fiscal year and 14.53% next fiscal year. The company has a dividend yield of 1.70%. The company is expected to maintain its high EPS growth over the next few years as housing recovery continues to take hold. Given its high EPS growth rate, I believe the stock will continue to outperform S&P 500 over the next couple of years.

About the author:

Growth at reasonable price (GARP) investor.

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