Analysts Initiate Coverage On HD Supply Holdings: Three Positive, One Neutral

Four analysts initiated coverage of HD Supply Holdings HDS Tuesday and the outlook is mostly favorable.

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JP Morgan

JP Morgan analysts C. Stephen Tusa, Jr. and Drew Pierson assigned an Overweight rating to the Atlanta industrial distribution firm. The analysts forecasted “best-in-class” revenue growth. And, they were pleased with the company's exposure to construction-related markets, as 35 percent of its revenues are exposed to them. Additionally, they like HD Supply's heavy investments, noting, “HDS is spending heavily on this front ($600mm+ since 2010), putting its money where its mouth is. By holding the returns on investments demonstrated in 2011-2012, HDS could outgrow by 5-6% versus markets.”

While the firm is concerned about the company's leverage, the analysts still favorably view the firm and offer a price target of $27.

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Bank of America

Bank of America Merrill Lynch analysts Andrew Obin, Anna Kaminskaya and Akshay Bhatia came out of the gates with a Buy rating on HDS. Unlike JP Morgan, they're satisfied with its leverage, stating, “We highlight the company's multiple sources of leverage (operational, cyclical, and financial), which will enable HDS to grow earnings well ahead of the peer group going into CY14 and beyond.” However, it shares a similar price target with JP Morgan at $28.

Deutsche Bank

Deutsche Bank analysts John G. Inch and Karen Lau joined the party with a Buy rating, as well. The firm believes HD Supply's EPS will grow rapidly at $1.75 in 2014 and $2.55 in 2015, citing “above-average market sales expansion, declining interest expense, significant structural tax benefits and step-down in intangibles amortization.”

The analysts also believe it will sustain above-market growth due to expanded hiring, extending of its operational footprint, targeting of specific verticals such as multi-family units and introducing thousands of new SKUs each year. And, they agree with JP Morgan's assessment of HD Supply's exposure to construction-related markets, citing it as a favorable point to support above-average future growth.

Among other positives, Inch and Lau enjoy the company's exclusive North American focus, which eliminates direct exposure to “volatile and uncertain international markets and the difficult European economies.” Deutsche Bank agrees with the aforementioned assessments, noting a price target of $28.

Goldman Sachs

Finally, Goldman Sachs analyst Joe Ritchie is the lone voice of dissent on Tuesday – sort of. Ritchie initiated coverage of HD Supply with a Neutral rating.

Like the other analysts, Ritchie believes HD Supply will benefit from its exposure to construction-related markets. However, he is wary of potential execution risks, noting he expects about half of the firm's EBITDA growth to come from internal initiatives. Ritchie offers a price target of $23 versus the high-$20s offered by the rest.

HD Supply Holdings is down over one percent on Tuesday morning, suggesting investors have yet to latch on to the discussed ratings.