Despite increasing headwinds across the home improvement landscape, including rising interest rates (with mortgage rates up 80 basis points over the last 12 months) and declining existing home sales recently, wide-moat Home Depot HD continues to deliver healthy top-line results. In the third quarter, comp sales of 4.8%, which were modestly better than our 4.5% forecast, and revenue growth of 5.1%, which was a bit weaker than the 5.9% we expected, benefited from good demand across both the pro and do-it-yourself customer and the growth of the digital business (28%). EPS was handily ahead of our $2.26 estimate, at $2.51, but $0.20 of this upside stemmed from a lower tax rate in the period, which we don't expect to repeat. With an updated outlook calling for $8 billion in repurchases in 2018 from $6 billion prior, we don't expect any major changes to our final-quarter outlook to reach the new $9.75 EPS guidance outside of higher buybacks, which will add a few pennies to our forecast. We don't expect any material change to our $168 fair value estimate and view shares as fairly valued.
We see a few factors that could help support Home Depot's growth even with a housing slowdown. First, the maintenance and repair business provides a sticky, consistent customer that could drive incremental purchases. Second, as the baby boomers continue to age, the do-it-for-me consumer becomes more important, and Home Depot can link pros and consumers together to facilitate home renovations, particularly as the housing stock ages and consumers stay in their homes longer. Additionally, while caution has sounded on home sales and mortgage applications, existing home sales prices are still rising, indicating that the wealth effect remains intact, spurring willingness to spend in the category. These factors support our long-term outlook, including an average 3.4% comp sales growth, 3.6% sales growth, and modest operating margin expansion of about 20 basis points per year, to 16% in 2027.
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