About the company
The Home Depot, Inc. is an American home improvement supplies retailing company that sells tools, construction products, and services.
The company is headquartered at the Atlanta Store Support Center in Cobb County of Atlanta, Georgia. It operates many big-box format stores across the United States (including all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands, and Guam), all 10 provinces of Canada, and the country of Mexico.
The MRO company Interline Brands is also owned by The Home Depot with 70 distribution centers across the United States.
Increase in price target
We increased our price target on The Home Depot from $150 to $170. The shares are currently trading on a P/E of 23x in line with its historical average.
Given the improving economic climate, we are of the opinion that The Home Depot shares should be trading on a higher P/E.
The shares are also trading on an indicative gross dividend yield of 2.3%.
The rationale for the increase in price target was as follows:
- Well positioned to benefit from future growth - The stock is supported by broader macroeconomic trends that favour improving household formation combined with a positive trend new housing started over the last several years and increasing age of existing housing stock
- Sales - Home Depot’s plan for $101 billion in sales by 2018 is seen as being conservative by the market in general
- Growth - The Company investments in the fast growing Maintenance, repair and operations industry should also provide the potential for upside to comp store sales expectations
- Focuses on reducing its costs - Management has demonstrated an exceptional ability to manage expenses in the past and we are comfortable with longer-term guidance for expenses to grow at 50% of sales, even in the face of several broader industry pressures such as rising healthcare and labour costs
- EBIT Margins - Expectations for a 14.5% operating margin by 2018 also appear conservative
- EPS - Overall we expect longer-term EPS to grow in the low teens with upside to the mid and high teens possible from larger than expected share repurchases (funded through incremental debt leverage) and/or better than expected comp store sales
- Share buyback – In February, the company raised its dividend to 89c from 69c previously and authorised a $15 billion share repurchase programme, replacing its previous one. Two years ago, the company authorised an $18 billion buyback programme. Management also said that the target share of earnings paid out to shareholders in dividends (known as the dividend-payout ratio) would be increased to 55% from 50% currently
- Indicative gross dividend yield – 2.3%
Conclusion
The Home Depot has a strong growth potential given a solid macro tailwind and we believe the company can achieve meaningful gross margin upside. We believe The Home Depot should be a core holding in a well-diversified portfolio.
Disclaimer: This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.