HD Supply Poised for Continued Growth in 2017

We are maintaining our $33 per share fair value estimate after incorporating

All of HD Supply’s segments contributed to the company’s sales growth during the fourth quarter. Construction and Industrial sales were up 4.3%, Waterworks sales were up 3.4%, and Facilities sales were up 2.3% over the year-ago quarter. Consolidated EBITDA margin declined 20 basis points to 10.3% as Construction and Industrial margin expansion (up 100 basis points year over year) was more than offset by margin compression within the company’s other segments.

HD Supply’s free cash flow generation improved substantially in fiscal 2016, coming in at $432 million versus $336 million. The company made progress on reducing its leverage by paying down $200 million on its outstanding term B-1 loans ($639 million remains). Although HD Supply’s net leverage remains elevated at about 4 times fiscal 2016 EBITDA, we think the company will continue to utilize its growing free cash flow to pay down debt, and we estimate the firm will reach its target net debt/EBITDA ratio of below 3 times by early 2018.

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