Home Depot Inc has an Aggressive Plan to Lift Its Stock in 2018

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Home Depot Inc (NYSE:HD) dished out news this week that might have been warmly embraced by the market at another time. Amid the risks of an overbought market and an uncertain future for housing, however, its spending plans didn’t exactly prod HD stock higher.

Home Depot Inc - HD stock logoAlso, shareholders expecting Home Depot Inc. to raise its full-year guidance were disappointed.

A closer look at HD stock, however, shows a compelling bullish case for 2018.

Home Depot Spends on E-Commerce

The plans for the future were laid out at an investor conference that took place on Wednesday. Over the next three years, Home Depot Inc. will add $5.4 billion to its previously-planned expenditures. The bulk of that money will be spent on making the checkout process faster, higher wages and a more efficient supply chain.

Most of those initiatives will directly or indirectly bolster the reach of the e-commerce platform for HD stock.

“The front door of our store is no longer at the front door- it’s in the customers’s home, in their pocket, on the job site,” Home Depot Inc CEO Craig Menear said at the event.

Shareholders weren’t necessarily thrilled with the idea of upping its spending in an environment the retailer arguably doesn’t need to shell out more money. It’s handily staying ahead of rival Lowe’s Companies, Inc. (NYSE:LOW), and has — surprisingly enough — defended itself reasonably well against ever-growing Amazon.com, Inc. (NASDAQ:AMZN).

Similarly unpopular was full-year guidance that remained stubbornly flat. The company is still looking for revenue growth of 6% for 2017, and a roughly 7% increase in same-store sales. Home Depot is also still calling a for a full-year profit of $7.36 per share on HD stock, which is just shy of the $7.38 analysts expect.

Investors may be missing the bigger picture here, however.

HD Stock Will Deliver Strong Results in 2018

While the retailer didn’t raise its guidance as it was expected to, bear in mind Home Depot may simply be trying to set up an earnings beat for the early part of the coming year. That’s a feat that’s much more powerful that merely raising guidance now.

Home Depot Inc. has topped estimates in each of the past five quarters, and beat its profit outlook in ten of the past twelve.

As for the planned spending, it should be viewed as an investment in growth. HD stock has the capital, and should be spending it to make the business bigger instead of becoming complacent.

As evidence of this idea, one only has to look at what happened when Wal-Mart Stores Inc (NYSE:WMT) upped its wages a couple of years ago.

At first it was done begrudgingly, with WMT shareholders convinced the added payroll expense would crimp profits. As it turns out, however, even just the modest wage increase has led to better worker-engagement and productivity at Wal-Mart. Wal-Mart’s rival Costco Wholesale Corporation (NASDAQ:COST) — which pays far better than average by retail standards — had already proven that better pay leads to better, not lower, profitability.

Investments outside of bigger paychecks are likely to yield better, even if mostly unexpected, results for Home Depot.

There’s also Home Depot’s commitment to share repurchases, too. Though its pace of buybacks is slowing, HD stock has $15 billion now set aside for stock repurchases in the future.

Bottom Line for HD Stock

HD stock has somewhat bounced back since negative reactions to its spending plans on Wednesday. However, it has yet to make it back to where it was before the stumble. Investors aren’t sure if now’s the best time to spend.

But the economy (and the housing market in particular) is still going strong. And an investment in offense rather than defense will better serve Home Depot Inc. in 2018.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.


Article printed from InvestorPlace Media, https://investorplace.com/2017/12/home-depot-inc-hd-stock-long-term/.

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