Home Depot: October 2020 Price Target Update!

Ticker: HD

Rating: Overweight

Price Target: $305

Target Date: Q1 2021

Industry View: In-line

We are updating our Home Depot (HD) rating from our call earlier this year. Since we last analyzed the stock, we believe COVID will actually continue to be used as a tailwind to the home improvement sector. Also looking at the early stages of the, “One Home Depot” program, we believe this investment has well equipped their business to meet strong pent up demand. We view this investment program as promising and as necessary steps in the right direction. Given these two growth drivers we are updating the stock to overweight and assigning a price target of $305.

Getting into more detail on the above, Home Depot (HD) is likely to see continued momentum relative to other categories until there's a COVID vaccine. HD's speed and flexibility adapting to COVID is an early indicator that the One Home Depot investments (supply chain improvements and IT infrastructure development) have been successful and should continue to drive store productivity. As such, we are forecasting a very strong 2nd half of 2020. Seasonal inventory hasn’t been reduced at all and consumer trends look to actually buy more of this industry in times of crisis. Coupled with a push towards de-urbanization (people leaving cities) and DIY projects, we see HD delivering strong through the holiday season.

Given these macro influences, we believe EBIT margins can expand from their historical ~14% levels. Although we don’t think their recent margin report is the new norm (~16%), we believe, somewhere in between is doable on a go forward basis. We are excited to see how a mature business like HD, can continue to innovate and grow.