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Home Depot Continues to Build Its Dominant Position

Wide-moat Home Depot is set to deliver another solid year of cash flow in 2015.

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 Home Depot (HD), the world's largest home-improvement retailer, with more than $83 billion in revenue, continues to benefit from the recovering housing market and perpetual improvements in its merchandising and distribution network. After decades of aggressive store expansion and concept growth, the company has refocused on its core business, big-box stores--it sold its professional supply business in 2007 and shuttered its China retail operation in 2012. Recent operational changes could strengthen the firm's competitive position, particularly if housing prices and turnover continue to improve.

We've raised our fair value estimate to $104 from $88 per share in response to the company's updated 2015 outlook, as well as a lower cost-of-equity assumption (now at 9% from 10%), adjusting for our updated inflation outlook. Wide-moat Home Depot remains one of the best-positioned businesses on our coverage list, with few meaningful competitors in either the brick-and-mortar or e-commerce channel. However, with the shares climbing more than 50% over the past year, they are trading at more than 22 times the midpoint of 2015 earnings, making them appear fully valued (since Home Depot expects low-double-digit earnings growth in 2015).

Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.