Home Depot Can Weather the Storm

With the housing market well into its current cycle, year-over-year improvement has become incrementally more difficult for many businesses. Slower growth of home prices, measured housing starts growth, and dampened cadence of turnover, particularly at the low-priced end of the market are headwinds that Home Depot HD must contend with. We are not concerned, however, about an imminent slowdown in the business, as mitigating factors like age of housing and rising headship rate provide defense from a near-term meaningful degradation in demand. We think that as a market leader, the company is best positioned to continue to still win modest share thanks to solid merchandising and seamless omnichannel experience (with e-commerce representing 8% of sales in 2018, with 50% of orders executed online with pickup in store). Additionally, opportunities to grow the pro business, supported by ongoing investments, should help bolster the firm’s top line, allowing for the natural leverage of expenses.

The outlook for 2019 overall is within our long-term perspective for wide-moat Home Depot, which incorporates average comps of 3% and modest operating margin improvement over the next decade at about 10 basis points annually, given the maturity of the business and the position in the economic cycle. While the firm’s 2019 projection was higher on the comp side than our forecast (at 5% versus 4%, respectively), this upside should be offset by higher expenses as the company spends to improve its brand intangible asset, leading to an operating margin of 14.4% versus our 14.7% estimate. In this vein, we don’t plan any material change to our $170 fair value and view shares as fairly valued, trading at 18 times Home Depot’s $10.03 EPS guidance (which is below our $10.28 and consensus $10.25 outlooks).

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