Why Home Depot Inc Stock Will Keep Grinding Higher

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Another quarter, another beat for Home Depot Inc (NYSE:HD) and another rally for HD stock.

Once again, Home Depot smashed analyst estimates in its third quarter earnings report. Comparable sales rose 7.9%, well above analyst estimates which stood at up 5.4%. As was widely expected, the big beat was driven by a flurry of hurricane-related buying. 

Why Home Depot Inc (HD) Stock Will Keep Grinding Higher

The big comp number led to a robust earnings beat. Earnings rose 15% in the quarter and are now expected to rise 14% this year.

HD stock was up 1.6% at Tuesday’s close.

HD stock is now up approximately 25% so far this year, 70% over the past 3 years, and 165% over the past 5 years.

This secular bull run in HD stock will continue. The company continues to exercise its dominance in the secular demand building materials space. Comparable sales growth is showing no signs of slowing. Margins continue to expand. The valuation remains reasonable.

Based on all this, I think HD stock will head towards $190 over the next 12 months. Here’s how I get there.

Home Depot Is a Secular Growth Story

Market observers love to hype up the secular growth prospects of the FANG stocks, but Home Depot actually has much more stable and secure secular growth prospects.

Think about this: Amazon.com, Inc. (NASDAQ:AMZN) was founded in 1994. Facebook Inc (NASDAQ:FB) was founded in 2004. Alphabet Inc (NASDAQ:GOOG,NASDAQ:GOOGL) was founded in 1998. Netflix, Inc. (NASDAQ:NFLX) was founded in 1997.

Those companies are about about 20 years old and started flourishing as tech giants over the past 5-10 years.

Home Depot was founded in 1978 (almost 40 years ago) and has been flourishing as the go-to home improvement retailer right from the start.

From this standpoint, Home Depot has a much longer track record of weathering storms, surviving threats, and continuing to deliver out-sized shareholder returns. This long track record deserves a premium valuation.

HD Stock Still Has More Room to Run

Right now, Home Depot is on fire thanks to a confluence of tailwinds.

Operations are getting a big long-term boost from smart home tech adoption. Smart home tech is introducing a whole bunch of new products in the home improvement sector and that is causing a ramp in consumer demand.

Operations are also getting a big, short-term boost from multiple hurricanes (where there is destruction, there is rebuilding). As communities across America look to rebuild, Home Depot stores in those locations will be packed.

Bigger picture, appliance market share is booming thanks to the sudden demise of Sears Holdings Corp (NASDAQ:SHLD). Flooring market share is also booming thanks to the Pro Services business. Moreover, HD stock has not only proven itself to be immune to the Amazon disease plaguing the rest of retail, but it has also shown a great ability to steadily grow its own e-commerce business (digital sales continue to rise around 20%).

While the nature of these tailwinds will change over time, Home Depot will continue to benefit from a plethora of tailwinds into the foreseeable thanks to its leadership position in the secular growth home-building and home-improvement markets.

Consequently, the earnings growth outlook for HD stock is pretty promising. Earnings have grown in the mid- to high-teens range over the past several years, driven by ~5% comps and healthy margin expansion.

Margins are still expanding, albeit at a slower rate. But comparable sales growth is actually accelerating. Overall, it looks fairly likely that 5%-and-above comps plus continued margin expansion will keep earnings growth on par with where it has been over the past several years.

The trailing 5-year average price-to-earnings multiple is 23. HD easily deserves that multiple today. Throw that average 23 multiple on next year’s earnings estimate of $8.33 per share, and you get to a 1-year forward price target of just over $190.

Bottom Line on HD Stock

HD stock will keep grinding higher thanks to its unparalleled leadership position in a secular growth market. The long-term trajectory will continue to be up, up and away.

As of this writing, Luke Lango was long HD. 


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/home-depot-inc-hd-stock-grinding-higher/.

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