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HD Supply (HDS) Displays Bright Prospects Despite Risks

Zacks Equity Research
·3 min read

On Jul 9, we issued an updated research report on HD Supply Holdings, Inc. HDS.

In the past three months, this Zacks Rank #3 (Hold) stock has gained 4.5% compared with the industry’s growth of 17.2%.



Existing Business Scenario

HD Supply’s Facilities Maintenance, and Construction & Industrial segments are likely to show resilience amid the coronavirus outbreak-led market downturn on the back of recovery signs in living space MRO and specialty construction markets. Of late, the company’s Facilities Maintenance segment has been benefiting from higher demand for its healthcare products.

Also, in response to the coronavirus crisis, it has taken several actions, including the deferral or elimination of discretionary expenses, reduction of planned capital expenditure, hiring freeze and the reduction of short-term executive pay. In the quarters ahead, the measures will likely help it maintain a healthy margin performance amid the crisis.

In addition, the company utilizes its cash flow for boosting organic growth capabilities, executing acquisitions, repaying debts apart from repurchasing shares. Notably, at the end of the first quarter of fiscal 2020 (ended April 2020), its free cash flow recorded an increase of 13.7% to $116 million on a year-over-year basis. Notably, further improvement in cash flows is likely to effectively support the company's capital-allocation strategies.

However, it has been experiencing a shift in the customer demand toward low-ticket products amid the coronavirus outbreak. Although the company’s order volume remains strong, its average order size has dropped significantly as demand for higher-ticket items such as HVAC and appliances declined. The pandemic’s impact on demand patterns for its products and services might have a bearing on its overall results in the upcoming quarters.

In addition, the company’s highly leveraged balance sheet remains concerning. Notably, exiting the first quarter of fiscal 2020, its long-term debt, excluding current installments, remained high at $2,033 million. The company’s combined liquidity balance of $797 million (exiting the fiscal first quarter) seems not to be impressive, considering its high debt profile.

Stocks to Consider

Some better-ranked stocks are Altra Industrial Motion Corp. AIMC, Chart Industries, Inc. GTLS and Ingersoll Rand Inc. IR. All the companies currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Altra Industrial delivered a positive earnings surprise of 9.78%, on average, in the trailing four quarters.

Chart Industries delivered a positive earnings surprise of 1.41%, on average, in the trailing four quarters.

Ingersoll Rand delivered a positive earnings surprise of 3.47%, on average, in the trailing four quarters.

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Chart Industries, Inc. (GTLS) : Free Stock Analysis Report
Ingersoll Rand Inc. (IR) : Free Stock Analysis Report
Altra Industrial Motion Corp. (AIMC) : Free Stock Analysis Report
HD Supply Holdings, Inc. (HDS) : Free Stock Analysis Report
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