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Industrial Products is currently one of the favored sectors — occupying the fourth position — among the 16 Zacks sectors. It yielded 3.8% return in the past six months.
Notably, the sector’s earnings are predicted to increase 24.2% in 2018 on revenue growth of 9.6%. For the third quarter, earnings and sales are anticipated to improve 18.5% and 7.6% year over year, respectively. Among many indicators, few supporting the sector’s growth are discussed below:
Prospering global economy and solid prospects in the U.S. economy are the key drivers of the sector. Also, expanding industrial production, rising demand for U.S.-made machinery and government’s favorable tax policy changes (implemented in December 2017) are favorable factors.
Investors interested in gaining exposure in the sector may choose stocks that have Zacks Rank #1 (Strong Buy) or #2 (Buy). Of many investment-friendly options, we believe that adding HD Supply Holdings, Inc. HDS to the portfolio is a smart choice. The stock currently carries a Zacks Rank #2 and has a favorable VGM Score of B. In the past six months, the company’s shares have outperformed the sector, having yielded 9.2% return.
Also, the company’s industry is positioned in the top 40% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Let’s delve deeper and discuss why HD Supply is a suitable investment option.
Bottom-Line Performance & Projections: HD Supply’s financial performance has outperformed expectations in the last four quarters, with an average positive earnings surprise of 8.07%. The average includes the impact of 3.13% earnings beat recorded in the second quarter of fiscal 2018 (ended Jul 29, 2018). On a year-over-year basis, the company’s bottom line in the fiscal second quarter surged 54.7% on the back of healthy segmental businesses.
For the third quarter of fiscal 2018 (ending October 2018), HD Supply anticipates adjusted earnings within 95 cents to $1.00 per share. This projection represents growth of roughly 19-25% from the year-ago quarter’s tally of 80 cents.
For fiscal 2018 (ending January 2019), the company predicts adjusted earnings per share in the range of $3.22-$3.35. At the mid-point, the projection reflects year-over-year growth of 42% from the year-ago quarter’s tally.
Driven by solid performance and impressive outlook, the company’s earnings estimates have increased in the past 60 days. Currently, the Zack Consensus Estimate for earnings is pegged at $3.30 for fiscal 2018 and $3.27 for fiscal 2019 (ending January 2020), reflecting growth of 1.5% and 2.2% from the respective 60-day-ago tallies.
HD Supply Holdings, Inc. Price and Consensus
HD Supply Holdings, Inc. Price and Consensus | HD Supply Holdings, Inc. Quote
Solid Top Line: In the second quarter of fiscal 2018, HD Supply’s top line increased 18.3% year over year on the back of organic sales growth of 10.1%. Segmental performance was impressive in the quarter, with Facilities Maintenance’s sales growing 6.6% and Construction & Industrial’s sales rallying 33.7% (including approximately 14.7% organic sales growth).
For the third quarter of fiscal 2018, HD Supply anticipates net sales in the band of $1,560-$1,610 million. This projection represents growth of roughly 14-18% from the year-ago quarter’s tally of $1,370 million.
For fiscal 2018 (ending January 2019), the company predicts net sales in the range of $5,900-$6,000 million. At the mid-point, the projection reflects year-over-year growth of 16.2% from the year-ago quarter’s tally of $5,121 million. Also, the company anticipates mid-single-digit growth in the residential construction market and low- to mid-single-digit growth in the non-residential market to boost the Construction & Industrial segment in fiscal 2018. Also, approximate 1-2% growth in “Living Space” MRO will boost the Facilities Maintenance segment.
The Zacks Consensus Estimate for revenues on the stock is pegged at $5.86 billion for fiscal 2018 and $6.33 billion for fiscal 2019, reflecting year-over-year growth of 1.5% and 7.9%, respectively.
Acquisitions: An interesting aspect about HD Supply is its acquisitive nature.
Over time, the company has fortified product portfolio and leveraged business opportunities through the addition of assets. Here, the buyout of A.H. Harris Construction Supplies in March 2018 is worth a mention. This buyout compliments the Construction & Industrial segment’s White Cap business and will expand its product offerings as well as customer base in the Atlantic regions, especially mid, south and northeast. Since acquired till the end of second quarter of fiscal 2018, A.H. Harris generated net sales of roughly $164 million.
Sound Capital Allocation Strategies: Apart from using free resources for acquisitions, the company engages in strengthening its selling channels and enablers. These accelerated investments are projected at roughly $12 million in fiscal 2018.
Besides, the company uses free resources for returning capital to shareholders by repurchasing shares. In the first half of fiscal 2018, the company repurchased approximately 2.3 million shares for $88 million under the $500 million share buyback program. This program was authorized by the company’s board of directors in August 2017.
Debt Profile: HD Supply’s long-term debt at the end of the first half of fiscal 2018 was $2,087 million, down 0.1% from the balance at the end of fiscal 2017 (ended January 2018). Moreover, the company’s debt profile is better compared with the industry. Its debt/equity of 129.8% is lower than the industry’s 148.8%.
Other Stocks to Consider
Other top-ranked stocks in the industry are Harsco Corporation HSC, MSC Industrial Direct Co., Inc. MSM and W.W. Grainger, Inc. GWW. While Harsco sports a Zacks Rank #1, MSC Industrial Direct and W.W. Grainger carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 60 days, earnings estimates for MSC Industrial Direct and W.W. Grainger have improved for the current year and the same for Harsco has been stable. Also, average positive earnings surprise for the last four quarters was 17.80% for Harsco, 2.56% for MSC Industrial Direct and 21.47% for W.W. Grainger.
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