Home Depot: Addition of SRS Distribution to Inflate Pro Business but Unlikely to Move Our Valuation

Home Depot announced a deal to acquire SRS Distribution, a residential pro trade distributor specializing in roofing, landscape, and pool verticals. Marking the largest deal in the retailer’s history, Home Depot plans to finance the $18.25 billion transaction (set to close in fiscal 2024) with a combination of cash and debt. The deal values SRS at 16.1 times 2023 adjusted EBITDA, which strikes us as a touch rich relative to the roughly 15 times EBITDA it paid for HD Supply back in 2020. That said, if we were to incorporate the financial impact of the SRS Distribution deal into our existing Home Depot model (including the $18.25 billion price tag, increased debt that raises leverage to around 2.5 times, and higher interest expense), our $263 fair value estimate would change minimally. Considering the uncertainty around the timing or closure of this deal due to potential anti-trust issues, we plan to incorporate SRS into our model as we obtain more visibility. Home Depot’s shares continue to appear overpriced, and we’d suggest investors remain on the sidelines. More critically, we don’t anticipate this transaction will sway our long-term prospects for low-single-digit top-line growth and midteens operating margins, particularly as SRS would increase Home Depot’s sales base by 6.5%.