JPMorgan Likes Home Depot For The Long Term

Home Depot Inc HD has seen its stock gain nearly 15 percent over the past year and has soared around 350 percent over the past five years.

Despite the strong outperformance versus the S&P 500 index, which returned 86 percent over the past five years, analysts at JPMorgan think the Dow-component retailer should be a core long-term holding for investors.

In a research report published ahead of Home Depot's earnings print (scheduled for August 16 before market open) Christopher Horvers of JPMorgan acknowledged that this may be the first quarter in some time where investors are no longer asking "what will Home Depot beat comps by."

He added that this sentiment may stem from:

1. Vendor commentary indicating a sequential slowdown in the quarter.
2. Retail inventory reductions.
3. Concerns over the promotional environment.
4. Tough comparisons in the back half of 2016.

Horvers also highlighted Census Retail Sales in the home improvement category, which decelerated to a 6.4 percent growth in the second quarter from 8.7 percent in the first quarter. However, the analyst argued that the 230 basis point sequential deceleration to Home Depot and rival Lowe's Companies, Inc. LOW's same-store sales suggests just 40 basis points of downside for Home Depot and 100 basis points of upside for Lowe's.

Related Link: High Expectations For Home Depot Earnings, Caution on Staples

Horvers also stated that the census data doesn't capture market share gains and any correlations "can misguide when the weather is highly volatile." As such, the analyst is "more positive on the sector."

Bottom line, Horvers reaffirmed Home Depot's status as "one of the best long-term stories" in the retail space given its sales and margin profile, the "Amazon-resistant nature" of the industry as well as its "significant" financial and operating leverage that "amplifies" long-term earnings per share growth.

"With internal momentum building, we expect HD to benefit from its refocused branding and value proposition, which have driven favorable traffic and ticket trends at the retailer," Horvers concluded. "In addition, internal initiatives enable HD to gain share vs. its competitors."

Shares of Home Depot remain Overweight rated with an unchanged $142 price target.

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