The Home Depot Inc. (HD) is a leading supplier of home improvement products and services in the United States.

I am neutral on Home Depot as its strong growth momentum and competitive strengths are offset by its above-average valuation multiples. (See Analysts’ Top Stocks on TipRanks)

Strengths

Home Depot is the biggest retailer of home improvement tools, equipment, and services in the U.S. The company owns and operates many big-box format stores in the United States, Puerto Rico, Guam, the Virgin Islands, every province in Canada, and all states in Mexico.

Recent Results

Home Depot’s third-quarter revenue stood at $36.8 billion, rising 9.8{49352ce17ba8b8c977b46090d4022735cbbf9c8d2a96e7181f87be9b36a1fd69} and beating the consensus estimates of $35 billion. Its digital sales also saw an improvement of 8{49352ce17ba8b8c977b46090d4022735cbbf9c8d2a96e7181f87be9b36a1fd69} in the quarter and sales accelerated in October, the last month following the quarter’s end.

HD generated earnings of $3.92 per share compared to consensus estimates of $3.41 and saw its net income rise to $4.13 billion.

However, customer transactions saw a reduction of 5.5{49352ce17ba8b8c977b46090d4022735cbbf9c8d2a96e7181f87be9b36a1fd69} to 428.2 million. On the other hand, the consumer average ticket was about $82.38, showing an increase of 12.9{49352ce17ba8b8c977b46090d4022735cbbf9c8d2a96e7181f87be9b36a1fd69}. This was partially attributed to higher copper and building material prices, although wood prices fell.

Despite the rising costs, the company says customers are willing to buy new products like its exclusive Behr Dynasty paints that cost over $50 a gallon.

Home Depot also saw its same-store sales climb 6.1{49352ce17ba8b8c977b46090d4022735cbbf9c8d2a96e7181f87be9b36a1fd69}, outstripping consensus estimates of 2.2{49352ce17ba8b8c977b46090d4022735cbbf9c8d2a96e7181f87be9b36a1fd69} by a large margin. The company’s improved sales were also attributed to Halloween, as customers snapped up unique limited products.

The company ended its third quarter with cash and cash equivalents of $5.07 billion, shareholders’ equity of $1.04 billion, and long-term debt of about $36.7 billion.

Home Depot has now set its sights on the Christmas season in the fourth quarter of 2021. The company will be offering exclusive deals for a longer period to increase customer demand.

Valuation Metrics

Home Depot stock looks richly valued at current levels. Its forward enterprise-value-to-EBITDA multiple is currently 18.2x which is well above its five-year average of 14.3x. Furthermore, its forward price-to-normalized-earnings ratio is 25.9x which is also well above its five-year average of 21.3x.

That said, growth is expected to be strong in the short term as revenue is expected to grow by 13.4{49352ce17ba8b8c977b46090d4022735cbbf9c8d2a96e7181f87be9b36a1fd69} and normalized EPS is expected to grow 28.7{49352ce17ba8b8c977b46090d4022735cbbf9c8d2a96e7181f87be9b36a1fd69} for Fiscal 2022 (ending January 31, 2022).

Wall Street’s Take

Turning to Wall Street, Home Depot earns a Strong Buy consensus rating based on 16 Buys and five Holds assigned in the past three months. Additionally, the average Home Depot price target of $422.60 implies 2.1{49352ce17ba8b8c977b46090d4022735cbbf9c8d2a96e7181f87be9b36a1fd69} upside potential.

Summary and Conclusion

Home Depot is a great company with a strong competitive positioning in its sector. It has enjoyed consistently strong growth and profitability for decades. It has also grown its dividend by a large amount over the course of its existence. Furthermore, Wall Street analysts are overwhelmingly bullish on the stock right now.

That said, the stock looks quite expensive here, and it is trading well above its historic valuation multiple averages. As a result, investors might want to wait for a pullback in the shares before initiating a position. At the same time, the company has proven itself to be a long-term winner, so those who hold a position may not want to part with their shares.

Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.

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