Home Depot's Growth Impresses

We don’t plan any material changes to our $165 fair value estimate for

The growth metrics Home Depot continues to capture are impressive for a relatively mature business that has planned to double its investment to remain competitive, spending $11 billion through 2020 on stores, IT, and the supply chain, offering expense leverage, and permitting modest operating margin expansion to occur (20 basis points to 16.1% during the quarter). However, this doesn’t change our long-term outlook for the industry leader, which calls for average sales growth of 3.6%, comp growth of 3.4%, and high-single-digit EPS growth (which incorporates around $6 billion in share repurchases annually) beyond 2018 as we move through the later parts of the current economic cycle. Our 2020 forecast includes gross margin of 34%, SG&A expenses (including depreciation) of 19.1%, and operating margin of 15%, ahead of the 33.6% gross margin and in line with the SG&A (18.6%-19.2%) and operating margin (14.4%-15%) guidance the company has offered, as we think product mix and brand resonance will allow it to take price on some items and further leverage occupancy costs, supporting our wide economic moat rating.

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