The Ratings Game: Home Depot’s investments may weigh on near-term results but analysts see the long-term benefit

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Home Depot Inc.’s investment strategy may be a drag on results in 2020, but analysts are bullish that it will all pay off in the long run.

Home Depot HD, -0.44%   gave weak guidance on Wednesday, which sent shares down nearly 2%.

But analysts see the stock decline and guidance as a “reset,” with Credit Suisse upgrading Home Depot to outperform from neutral after the event. Credit Suisse also raised its price target to $235 from $225.

Read: Home Depot’s investment plan weighs on fiscal 2020 outlook

“Home Depot lowered fiscal year 2020 comps/margins yesterday to a level that now seems achievable, potentially beatable,” analysts led by Seth Sigman wrote. “Previously, guidance and expectations had been too high all throughout fiscal 2019.”

Home Depot is guiding for sales and same-store sales growth of 3.5% to 4%, below the 4.3% FactSet consensus for both sales and same-store sales.

The strategy, called “One Home Depot,” aims to create a multiplatform, seamless shopping experience with the company spending on store renovations, its professional channel and more.

Raymond James analysts think the investments set the home improvement retailer up for share gains.

“Importantly, it is the interconnected blend of when all these investments come together that provides the opportunity for an acceleration across the company’s various business lines, which reminds us of the fundamental strategy behind many of the other winners in the retail industry, such as Target and Best Buy,” analysts led by Matthew McClintock said.

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“This reaffirms our belief that the gap between stronger retailers (particularly those that can make these investments) and weaker retailers (capital/profitability starved) will only widen and accelerate going forward.”

Raymond James rates Home Depot outperform.

JPMorgan analysts also think Home Depot is following in the footsteps of other successful retailers that have separated themselves from businesses that are struggling. Analysts there make a comparison to Target Corp. TGT, +0.50%   and Walmart Inc. WMT, +0.38%   rather than Best Buy Co. Inc. BBY, +0.67%  

“While Home Depot has hit some speed bumps in its strategic plans this year (mainly on the IT front), its willingness to be deliberate and roll initiatives when fully ready for the customer reflects its commitment to win over the long term,” wrote JPMorgan in a note.

Analysts rate the stock overweight with a $241 price target, down from $252. JPMorgan also notes that

Home Depot is able to avoid feeling the “Amazon effect.” AMZN, +0.10%  

“[W]e believe Home Depot remains one of the best long-term stories given its initiatives, the duopolistic/Amazon-resistant nature of the industry, and operating leverage/EPS growth that accelerates in 2021 and beyond.,” analysts said.

UBS analysts says it would be wise to remember that though Home Depot is investing to grow its e-commerce, it’s already the fifth largest online retailer in the U.S., with e-commerce accounting for 10% of sales.

“Assuming this continues to grow 15% to 20%, it would contribute 150 basis points to 200 basis points to Home Depot’s overall growth,” UBS said.

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And analysts think share buybacks will accelerate.

“This means Home Depot is well placed to generate consistent high-single-digit earnings per share growth over the long-term by low-to-mid-single-digit comps, stable margins and share repurchases,” analysts said.

UBS rates Home Depot buy with a $250 price target.

Home Depot stock is up 23.7% for the year to date while the Dow Jones Industrial Average DJIA, +0.36%   has gained 20.5%.