Can Home Depot Inc. Build Upon the Foundation Laid Out by Wall Street?

By Markets Fool.com


Source: Home Depot, Facebook.

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What: Shares of do-it-yourself home improvement retailer Home Depot slipped by $0.44, or 0.4%, in Wednesday's trading session to close at $116.31 despite four Wall Street companies boosting their price targets on the company following its fourth-quarter earnings release Tuesday morning.

So what: As a quick refresher, Home Depot reported a 44% increase in adjusted EPS in the fourth quarter to $1.05 from $0.73 as its net sales increased 8% to $19.2 billion. Citing a recovering U.S. housing market and "solid execution," Home Depot announced an $18 billion share buyback program as well as a 26% increase of its quarterly dividend to $0.59. Management noted its intent to target a 50% dividend payout ratio moving forward. Looking ahead, Home Depot expects to grow net sales by 3.5%-4.7% in the upcoming year and deliver $5.11-$5.17 in adjusted EPS after accounting for buybacks.

On the heels of this announcement, four Wall Street companies boosted their price target, or perceived fair value figure, on Home Depot while holding their rating steady at the equivalent of a "buy." These companies are:

  • RBC Capital Markets, which raised its price target from $116 to $127.
  • Argus, which boosted its price target from $110 to $130.
  • Telsey Advisory Group, which lifted its price target from $115 to $125.
  • UBS, which increased its price target from $115 to $129.

According to Michael Lasser, covering analyst at UBS, a growing macro view, improved water heater and appliance sales, and Home Depot's omni-channel initiative are really beginning to pay dividends. Also, Lasser believes the company is benefiting from the switch to its own private-label credit card, which allows it to charge a fee to account holders and collect additional revenue.

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Now what: Taking into consideration the foundation Wall Street has laid out for Home Depot, the question investors have to ask is whether the company's fundamentals support a $125-$130 valuation.

Source: Home Depot, Facebook.

On one hand, Home Depot's success is somewhat dependent on continued strength in the housing market. While Federal Reserve chairperson Janet Yellen made it clear that the Fed will be hesitant to raise rates quickly, skeptics have to be concerned with what might happen to housing sales and home improvements when lending rates begin to rise. At nearly 20 times forward earnings, Home Depot is now trading in-line with the S&P 500 and is no longer considered "cheap."

Then again, Home Depot's emphasis on improved point-of-sale technology, employee training, and in making its website easier to navigate, have all paid dividends. Home Depot has found a way to make shopping an easier and more pleasant experience for the consumer, and its store credit card can be approved in as little as 45 seconds via an online application, boosting convenience and loyalty.

As for me, I'm certainly not brave enough to bet against the clear leader in the home improvement space. However, I'm also not seeing compelling intermediate-term upside, especially considering a lack of clarity on interest rates and what that might do to the housing sector.

Home Depot very well could make for a solid long-term buy-and-hold stock, here, but I'd suggest the best course of action here would be to either watch and wait for a few quarters, or consider making small, regular purchases over time to average into your position.

The article Can Home Depot Inc. Build Upon the Foundation Laid Out by Wall Street? originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.