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Home Depot shares – one to take home

The Home Depot, Inc. is an American home improvement supplies retailing company that sells tools, construction products, and services.

We have increased the price target of The Home Depot from $170 to $230. The shares are currently trading on a P/E of 27x and an indicative gross dividend yield of 1.8%.

The main reason for the increase in price target is the ‘Trump tax reform’ which positions the retail industry exceptionally well in 2018. Basically, due to this tax reform, companies have started and are expected to continue increases employee wages.

Already, a broad range of large companies such as AT&T, Boeing, and Wells Fargo have announced plans to pay higher wages/special bonuses to employees.

Analysts expect retailers are now increasingly likely to increase wages, especially given the tight labor market combined with accelerating sales through said stimulus.

Looking back at the Economic Growth and Tax Relief Reconciliation Act of 2001, sales growth at most discretionary retailers significantly accelerated in the twelve months afterwards

Rationale for the increase in price target as follows:

• The Trump tax reform positions the retail industry exceptionally well in 2018 – Due to the tax reform, US companies have already started to increase wages which is positive for retailers. The market is expecting wages to increase in the US leading to an increase in spending in the economy which will benefit companies like Home Depot

• Well positioned to benefit from future growth - The stock is supported by broader macro economic trends that favour improving household formation combined with a positive trend new housing started over the last several years together with the 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 of 2017, the Company raised its dividend to 89 cents from 69 cents previously and authorised a $15 billion share repurchase program, replacing its previous program. Two years ago, the company authorized 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 – 1.8%

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.

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

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.

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