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Stock Analyst Update

Home Depot's Growth Impresses

The growth metrics the wide-moat retailer continues to capture are impressive for a relatively mature business.

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We don’t plan any material changes to our $165 fair value estimate for  Home Depot (HD), despite second-quarter same-store sales of 8%, which outperformed our forecast for 6% growth (on top of already robust 6% comps in the second quarter of 2017). The company adjusted its full-year outlook to account for robust spring season performance, thanks to garden and outdoor performance, which had lagged in the first quarter. The updated 2018 outlook calling for 7% sales, 5.3% comps, and $9.42 in earnings per share (from 6.7%, 5%, $9.31 prior, respectively) implies second-half sales growth at a mid-single-digit clip, comps below 5%, and more than 30% EPS growth. However, Home Depot is trading at 20 times our 2019 estimate versus a single-digit EPS increase, rendering shares overvalued.

The growth metrics Home Depot continues to capture are impressive for a relatively mature business that has planned to double its investment to remain competitive, spending $11 billion through 2020 on stores, IT, and the supply chain, offering expense leverage, and permitting modest operating margin expansion to occur (20 basis points to 16.1% during the quarter). However, this doesn’t change our long-term outlook for the industry leader, which calls for average sales growth of 3.6%, comp growth of 3.4%, and high-single-digit EPS growth (which incorporates around $6 billion in share repurchases annually) beyond 2018 as we move through the later parts of the current economic cycle. Our 2020 forecast includes gross margin of 34%, SG&A expenses (including depreciation) of 19.1%, and operating margin of 15%, ahead of the 33.6% gross margin and in line with the SG&A (18.6%-19.2%) and operating margin (14.4%-15%) guidance the company has offered, as we think product mix and brand resonance will allow it to take price on some items and further leverage occupancy costs, supporting our wide economic moat rating.

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

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