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Build Your Portfolio with The Home Depot

On several occasions, Market Focus, a publication of Value Line has recommended that investors consider shares of The Home Depot (HD). The Atlanta, Georgia-based corporation runs a chain of more than 2,280 retail building supply/home improvement stores located throughout the United States, Canada, and Mexico. Its market cap exceeds $215 billion; it employs over 410,000 individuals; and it has been a component of the Dow Jones Industrial Average since 1999.

Here’s a recent analysis of The Home Depot by Ian Gendler, Executive Director, Value Line Research.

The Home Depot's fiscal first-quarter (ended May 5th) numbers need some explaining. The top line was essentially on par with our $26.4 billion forecast, but comparable-store sales growth missed the mark, rising 2.5% (the consensus was 4.2%). There were two primary reasons for the lackluster comps: wet weather in February that delayed projects and lumber price deflation. Absent these two headwinds, management estimated that comps would have been up about 4.5%. Nonetheless, the company delivered strong earnings of $2.27 a share, $0.12 ahead of our call and 9% higher than the year-earlier tally. Expense discipline, operating margin expansion (despite a 36-basis-point dip in the gross margin), share repurchases, and a lower-than-expected tax rate all lent support to share earnings.

The retailer's full-year fiscal 2019 guidance was unchanged, with some caveats. Key assumptions were maintained, including top-line growth of 3.3%; a roughly 5% increase in comps; and share earnings of $10.03. Its macroeconomic outlook was also little changed since late February, and despite some unevenness in the housing market, interest rates have pulled back and trends in home price appreciation, household formation, turnover, and the age of the housing stock remain supportive. However, The Home Depot declined to take into account recent tariff increases on some imports from China to 25% and lumber prices in its outlook. Both situations are fluid, though we are more concerned with lumber than tariffs. Leadership noted that if lumber prices remain at recent levels, they could pull as much as $800 million from its sales forecast. All told, we are leaving our sales and earnings targets intact, for now.

We still think that there is plenty to like here. Long-term capital gains potential is not head-turning, but this best-in-class retailer typically commands a premium valuation. Moreover, the stock stands out for the near term and garners top marks for Safety, Price Growth Persistence, and Earnings Predictability. A generous dividend yield sweetens the pot.

Editor’s Note: Market Focus is Value Line’s open-access newsletter which provides unbiased insights on investments, the markets and the global economy.

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