NEW YORK, UNITED STATES – 2020/09/13: The Home Depot logo and store seen in Queens Borough of New … [+] York City. Home Depot (HD) the home improvement retailer said it will offer Black Friday discounts for two months, beginning in early November through December. (Photo by Ron Adar/SOPA Images/LightRocket via Getty Images)
SOPA Images/LightRocket via Getty Images

Home Depot (NYSE: HD), the world’s largest home improvement retailer, has gained roughly 46% – increasing from about $218 at the beginning of 2020 to around $319 currently, outperforming the S&P500, which grew 34%. Why? Home Depot has made a conscious effort to focus on its integrated retail strategy, which seamlessly connects online and offline channels, making its stores more efficient. This has resulted in double-digit growth in revenues and profitability in 2020, with the online space being a key driver of this impressive growth. The robust housing market has also provided the company with a favorable economic environment to thrive. In addition, the One Home Depot initiative, an $11 billion multi-year investment launched in late 2017, also positioned the business to continue delivering exceptional service and product assortment by strengthening its omnichannel capabilities. That said, the company is showing plenty of opportunities to keep expanding going forward. We discuss more in the sections below.

But is this all there is to the story?

No, not quite. Despite the company’s stock rally, Trefis estimates Home Depot’s Valuation at about $333 per share, around 4% above the current market price based on two key opportunities.

The first opportunity we see is Home Depot’s Revenue growth. 2020 was no doubt a stellar year for Home Depot’s top-line expansion (20% y-o-y growth) as millions of homeowners found themselves spending substantially more time in their homes. It should be noted that Home Depot’s average online transaction ticket size is three times that in a store. Sales using digital platforms soared 86% in fiscal 2020 compared to the prior year, and approximately 62% of online orders were fulfilled through a store. While the digital sales growth decelerated to 27% in the recent Q1, this growth was still up 2x on a two-year stacked basis. In fact, Home Depot was able to grow revenue by 33% in Q1, despite a tough comparison from last year and an increase in the vaccination rates in the U.S. In addition, sales per square foot grew 29.8% y-o-y in Q1 compared to a growth of 24.0% y-o-y in the same quarter a year ago. By and large, the retailer has been able to increase revenues per square foot, rather than generating revenues from the new square footage. All this indicating that its existing store network is being effectively used to drive revenues.

The second key opportunity stems from Home Depot’s valuation multiple compared to its peers. The stock now trades at a premium of 26x its projected 2021 earnings per share of about $12.89, per Trefis estimates. This is higher when compared to its peer, Lowe’s, trading at 20x forward earnings. However, we believe that Home Depot deserves this premium in multiple, given the strong revenue growth it has posted over the past years, and a trend that is expected to continue going forward. While both the home improvement retailer’s revenues grew 9% between 2017 and 2020, Home Depot’s revenues are expected to grow 4% over the next two years, compared to a 2% growth expected for Lowe’s. While we acknowledge that Home Depot’s revenue base of over $132 billion (in 2020) is much higher compared to around $90 billion for Lowe’s, still the growth Home Depot has posted is meaningful.

Our price estimate of $333 for Home Depot stems from a 25.8x P/E multiple and $12.89 in earnings per share in 2021. This implies around a 4% premium to the current market price near $320.

It is helpful to see how its peers stack up. Check out HD Stock Comparison With Peers to see how Home Depot compares against peers on metrics that matter.

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