Nudging Up Our Fair Value on Home Depot
With elevated existing-homes sales and prices that help turnover remain inflated--along with overhang of storm-related sales--home improvement spending should persist.
While weather provided both a headwind (due to store closures and mix) and tailwind (in terms of demand for products), wide-moat Home Depot (HD) posted a banner quarter, generating comp store sales of 7.9%, the fifth year in a row the company has delivered comp store sales of more than 5% in its fiscal third quarter. While gross margins languished a bit, down 17 basis points to 34.6% due to weaker product mix, both selling, general, and administrative expenses and depreciation were a bit better than we anticipated, helping offset this pressure. The company raised its full-year guidance to include comp store sales of 6.5% (versus guidance and our 5.5% forecast prior), sales that increase 6.3% (compared with 5.3% prior and our estimate of 5.4%) and EPS of $7.36 (up $0.07 and versus our $7.33 prior outlook). Given the likely overhang of storm-related sales, and the corresponding margin pressure from mix, we plan to take both our 2017 and 2018 estimates up modestly (big storm benefits have historically lasted three quarters) and raise our $156 fair value estimate by $1-$2.
We view shares as fairly valued, trading at 18 times 2018 earnings, but anticipate that over the near term, valuation will be supported by ongoing strength in the housing market. With elevated existing-homes sales and prices (as well as a still-low interest rates) that help turnover remain inflated, home improvement spending should persist. However, with five- and 10-year average comps of 6% and 2%, respectively, we model more normalized growth into our forecast over the decade ahead, as we expect the economic expansion in housing will slow to some degree. Our 3.5% comp store growth forecast leads to top-line and EPS increases of about 4% and around 9% (which should be bolstered by incremental share repurchases), respectively, over the next 10 years.
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Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.