The wide-moat retailer continues to stand its ground against online threats, but its shares are slightly overvalued today.
Wide-moat Home Depot
continues to benefit from the bifurcation of discretionary consumer spending, bucking the trend of so many other operators experiencing slowing demand across different categories of the retail landscape. We still see home improvement as one of the most defensive categories against the ever-growing threat of Amazon and expect Home Depot and Lowe’s to be able to stand their ground across a number of categories (lumber, paint) that translate poorly to e-commerce sales (The Wall Street Journal recently noted that only 25% of Home Depot’s business currently has robust online competition). This, coupled with our healthy outlook for residential improvement spend through the end of the decade, should bolster demand for Home Depot’s offerings. Our forecast through 2020 includes sales growth of 5%, operating margin of 120 basis points from 2017-20 (implying 2020 operating margins of approximately 15.4%), and low-double-digit earnings per share growth. This puts us past Home Depot’s 2018 revenue target of $101 billion by about $3 billion.
Jaime Katz, CFA, is a senior equity analyst for Morningstar.
While second-quarter comps and revenue were slightly below our implied forecast, operating efficiency prevailed, propelling earnings per share growth at a modestly faster rate than we anticipated. Home Depot maintained its full-year outlook but raised its earnings per share outlook to $6.31 (from $6.27) supported by 4.9% comps and 6.3% sales. Our prior outlook had surpassed the revised outlook, as we had already incorporated 16% earnings growth in 2016 ($6.34) prior to second-quarter results. That said, we plan to maintain our $125 fair value estimate and view shares as modestly overvalued, trading at 22 times our 2016 earnings forecast.
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