Home Depot Delivers Best-in-Class Results

Wide-moat Home Depot HD remains one of the best-positioned retailers we cover to defend against rising uncertainty across multiple issues. First, Home Depot has been insulated from rising tariffs, previously saying that it would affect less than 1% of sales, helped by the amount of locally sourced products. Second, with a solely North American presence, Home Depot has avoided fallout from headline risk surrounding coronavirus, which has spread rapidly in markets abroad. Third, Home Depot has fiercely defended against e-commerce competitors, growing the channel 21.4% in fiscal 2019, implying more than $10 billion in sales stemming from online options, or 9.4% of sales versus 7.9% in fiscal 2019. Finally, solid underlying housing metrics, including turnover, home prices, and age of the housing stock, are supporting product demand.

As a result of these factors, we believe 3.5%-4% sales and comp growth, with a 14% operating margin and $10.45 in earnings per share in fiscal 2020 is achievable. Our prior forecast included 3.7% sales and 3.5% comp growth, along with 14.1% in operating margin and $10.36 in 2020 EPS.

We plan to raise our $170 fair value estimate by a mid-single-digit rate to account for cash earned since the firm’s last report. However, even with this increase, we view shares as rich, as our discounted cash flow predicts 3.5% sales and 3.2% comp growth, which lead to more than 15% operating margins on average. The current market price implies either 4% comps and 18% operating margins or even higher comps, with mid- to high-teens operating margin performance. We believe these metrics could be difficult to achieve because of the elevated spending the company has pursued to maintain its leadership position, and given that operating margins peaked at about 15% in recent years. While the rotation to more defensive, domestic-exposure companies could keep demand for Home Depot shares elevated, we’d caution investors to wait for a wider margin of safety.

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