Is it Time to Buy Home Depot?

The leader in the professional and DIY home renovation and repair supply niches, Home Depot, Inc. (HD), has long been considered a steady, reliable stock. In today’s market environment – with President Trump’s aggressive trade policy and the opposition Democratic Party’s increasingly anti-business and anti-wealth policy stance – those are the very traits that may make HD an ever more attractive stock.

The share price has, long-term, reflected that reliability. In the last five years, it has showed a slow and steady increase, capped by a 12% gain in recent weeks after last month’s market sell-off.

The Underlying Strengths

Home Depot is the largest home improvement retailer in the US, with over $108 billion in annual revenue (nearly 50% more than its closest rival, Lowe’s [LOW]). HD is widely recognized as a leader in the contract supply industry, and in recent months, the company has seen a steep increase in its tool rental business – a segment directly primarily at professional builders. According to company CEO Craig Menear, “We know 90% of pros rent tools, but several years ago, only about one out of 10 pros rented from us. Today, that number has improved to one out of four, yet there remains opportunity for further growth as we continue to invest in our tool rental experience.”

Increase in tool rental helped push the company’s Q1 results to a 5.7% increase in net sales year-over-year (at $26.4 billion for the quarter), and 9.1% year-over-year increase in EPS (to $2.27). Net sales were in-line with expectations, while the EPS was a significant 4% beat of the forecast. A miss in same-store comparable sales was attributed to unusually wet weather nationwide during the quarter, which put a damper on construction activities.

Financial blogger Luke Longo (Track Record & Ratings) finds additional reason for optimism in the current state of the employment and housing sectors. Specifically, he sees “record low unemployment, a healthy job participation rate, and decade-high wage growth” interacting with lower mortgage rates to create “support for a healthy housing market.” As long as these factors remain, he says, “Home Depot will continue to report solid numbers, and HD stock will trend higher.”

Looking Forward

While HD’s management sees a solid foundation for the company now, they are preparing for the future. The company is confident enough to issue additional debt, locking in low rates in an effort to keep its large debt total affordable. While a somewhat risky move, it drew approval from five-star Guggenheim analyst Steven Forbes (Track Record & Ratings), who said, “HD raised $400 million more than we assumed, providing the company with greater near-term financial flexibility."

Forbes went on to comment about the company’s overall state and performance potential: “With no change to our interest expense outlook, we are maintaining our 2019 EPS estimate of $10.12 while reiterating our BUY rating and $215 price target. Bottom line, we continue to envision share price outperformance as we move through 2019 driven mainly by our conviction in HD's "Core" expense (business-as-usual) leverage…” His $215 price target suggests a modest 4.5% upside to the stock.

Also taking an upbeat line on HD is Stifel’s John Baugh (Track Record & Ratings). He agrees with the company on the overall business landscape, pointing out that a combination of weather and deflation artificially depressed same-store comps during Q1. For prospects going forward, Baugh says, “Management is optimistic on the macroeconomic environment and does not see any impact from SALT (state and local tax deduction changes), home price appreciation slowing, or weak housing turnover.” In other words, no matter what happens, people still need to maintain their homes. Baugh raised his price target on HD by 5%, to $210. At the time he set that target, on May 22, it indicated a potential 22% upside.

The Bottom Line

Home Depot offers investors a firm business model in a niche that customers will always need. The company has a growing professional customer base, and a comfortable lead over its competition. The situation is neatly summed up by another financial blogger, Matthew Cochrane (Track Record & Ratings), who writes, “When one takes a longer view, though, it becomes clear that this home-improvement retail giant is on the correct side of several trends and has made the right investments to stay on top of potential e-commerce competitive threats as well as its primary rival, Lowe's Companies.”

A look at HD’s analyst consensus confirms the general view: the stock has a ‘Moderate Buy’ ratings, based on 10 buys and 4 holds assigned over the past three months. The average price target, $207, suggests a 1% upside to the current share price of $205. Given the company’s solid quarterly results, expect that upside to adjust slightly higher in coming weeks.