I am neutral on The Home Depot, Inc. (HD) as it enjoys substantial competitive advantages and its price target implies decent total return potential, while Wall Street analysts are quite bullish on it. However, the near-term growth outlook looks weak and the valuation multiples appear a bit stretched.
The Home Depot, Inc., also known as Home Depot, is America’s largest home improvement store. It was founded in 1978 by Arthur Blank and Bernie Marcus and first opened its doors in June 1979. Since then, Home Depot has expanded into 2,300 stores across the U.S., Canada, and Mexico. Not only is it the biggest home improvement retailer in the U.S., but Home Depot is also one of the biggest companies in the U.S.
Home Depot’s Strengths
One of Home Depot’s biggest strengths is its presence across North America. The company is a household name and has become synonymous with home improvement and DIY projects in the U.S. Additionally, it sells an assortment of products, including décor items, garden products, home improvement products, and building materials. Home Depot also provides various services, including installation and equipment rental services. Thus, a major strength is the company’s diverse offerings.
The shortage in the housing market and the uptick in renovation projects, flipping, and DIY have only been furthered by the ongoing pandemic, and Home Depot is flourishing as a result.
Recent Results
Home Depot’s Q3 reports from 2021 have confirmed this, with the home improvement giant reporting sales of $36.8 billion. This was $3.3 billion more than the previous year – an increase of 9.8%.
Additionally, the net earnings for Q3 of 2021 totaled $4.1 billion, which is an increase from the previous year’s net earnings of $3.4 billion. Consequently, the diluted earnings per share increased from $3.18 per diluted share to $3.92. This was an increase of 23.3% from the previous year.
Valuation Metrics
HD stock looks a bit overpriced, as it trades slightly above its historical averages on an enterprise value to EBITDA ratio and normalized earnings per share basis. Its enterprise value to EBITDA ratio is 15.56x compared to its historical average of 14.42x, and its normalized earnings per share ratio is 21.97x compared to its historical average of 21.45x.
Meanwhile, analysts expect revenue and EBITDA to grow by only a small amount in 2022: revenue at 2.3% and EBITDA at 2.5%.
Wall Street’s Take
According to Wall Street analysts, HD earns a Moderate Buy analyst consensus based on 16 Buy ratings, six Hold ratings, and zero Sell ratings in the past three months. Additionally, the average HD price target of $427.95 puts the upside potential at 22.6%.
Summary and Conclusions
Home Depot is a leading specialty retailer that enjoys competitive advantages stemming from its vast economies of scale, brand power, pricing power, treasure trove of consumer data, and well-located stores.
On top of that, Wall Street analysts are generally quite bullish on the stock, and assign it an average price target that implies decent upside over the next year. It is also an attractive dividend growth stock with a long and illustrious history of increasing cash flow payouts to shareholders.
That said, the valuation multiples appear to be a bit elevated relative to the company’s history. Moreover, growth over the next twelve months is likely to be a bit weak, as much of the company’s near-term growth was pulled forward over the past two years thanks to COVID-19 and the booming housing market.
As a result, investors might want to wait for a pullback in the share price before initiating a position.
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