The Home Depot (HD) carries CFRA’s highest investment ranking of 5-STARS, or Strong Buy; the shares currently present an enhanced buying opportunity given the recent share price decline and our confidence in the underlying business, notes CFRA Research analyst Kenneth Leon in The Outlook.
We think the U.S. household may shift its spending habits to invest in home improvement and remodeling projects in the new normal. Spring officially began March 19, which kicked off HD's peak selling season for outdoor products.
We think the coronavirus is likely to shift consumer spending from travel and entertainment to home improvement projects, whether they be the backyard, or remodeling a kitchen or bathroom, or finishing a basement.
Home Depot is likely to remove guidance for FY 21 (Jan.) when it reports April-Q results in late May. However, we see HD as an attractive, stable retailer that can endure the economic downturn in the near term and is well positioned for recovery even in a new normal of social distancing.
We do not see a housing crash given low inventory, fewer speculative new homes in homebuilding communities, low household debt, and a conservative lending environment from the U.S. banking industry.
Home equity values not declining substantially are an important part of our investment thesis on HD shares. We see this metric under some pressure in the near term, but not declining 10% or more in this recession.
The current environment shows low housing inventory. Given record lower mortgage rates and scarcity of attractively priced homes, households are likely to invest in their homes with remodeling and renovation, in our view.
Our 12-month target is $255, applying a forward P/E of 24.3x our FY 21 (Jan.) earnings estimate versus a 21.0x three-year average.
U.S. household debt levels are conservative compared to levels evident right after the financial crisis over a decade ago. Risks to our recommendation and target price include significantly lower consumer spending and lower household income.
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