Bank of America says Home Depot will soar 15% from current levels, upgrades to 'buy' on home-improvement surge
- Home Depot was upgraded to "buy" from "neutral" by Bank of America on Wednesday, with the bank seeing shares climbing 15% over the next year.
- The home improvement retailer has recently rallied on a deluge of do-it-yourself project popularity, as quarantining Americans have used more free time to fix their homes.
- The company benefits from growing market share, moving millennials, strong home-improvement spending, and a resurgence of professional contracting, the analysts said.
- Home Depot shares are also somewhat inexpensive, "particularly considering that it is a high-quality company in an industry-leading position with favorable industry tailwinds," they added.
- Watch Home Depot trade live here.
Home Depot shares will rally 15% from Tuesday's close as coronavirus lockdowns boost the popularity of home improvement projects, Bank of America analysts said Wednesday.
The team led by Elizabeth Suzuki lifted the bank's price target for Home Depot to $330 from $290 and upgraded the shares to "buy" from "neutral" in a note to clients. Do-it-yourself activity surged throughout the pandemic as those stuck at home spent free time on improvement projects. The lift faces some risks, but Home Depot now represents a strong buying opportunity for investors interested in stay-at-home plays, Bank of America said.
"Although home improvement spending in the coming quarter may decelerate amidst sequentially declining government stimulus/ unemployment benefits, we believe that the longer-term tailwinds for the home improvement industry are generally favorable," the team wrote.
The retailer is hot off trouncing Wall Street's second-quarter estimates. The company reported record revenues and strong earnings on Tuesday, citing stay-at-home projects as a key driver of its outperformance. Shares traded slightly higher on the news before paring gains in the low-volume session.
Home Depot shares have rallied more than 80% since their March low, but Bank of America sees five reasons why it's not too late to own the stock. A resurgence in professional contracting activity from delayed projects should boost hardware sales, the analysts said, as nearly half of Home Depot's sales are to professionals. Consumers are also set to spend a greater share of their income on home improvement as they slash spending on other activities like travel and dining.
Homebuying activity among millennials also bodes well for the retailer, the analysts said. Bank of America's latest annual Millennials survey found that 70% of respondents are likely to buy a home in the next two years. With mortgage rates sitting near record lows, a homebuying spree could drive more consumers to retailers including Home Depot.
The company is also set to snag a healthy amount of market share throughout the coronavirus recession, according to the team. Smaller competitors have struggled more than larger retailers amid lockdowns, and Home Depot's ecommerce presence further bolsters its lead over brick-and-mortar locations.
"We expect the large, well-capitalized home improvement retailers such as Home Depot to be the largest beneficiaries from the retail trends during and after COVID-19," the analysts said.
Finally, Bank of America views the stock as just plain inexpensive. Home Depot trades at a price-earnings ratio of roughly 24x, a premium to retail's 19x ratio and the company's five-year average of 20x. But that level is warranted, the analysts said, "given superior industry fundamentals" and home improvement's outperformance against other sectors.
"Relative to the rest of the market, HD shares do not look particularly expensive, particularly considering that it is a high-quality company in an industry-leading position with favorable industry tailwinds supporting further upside," they added.
Home Depot traded at $283.12 per share as of 11:05 a.m. ET Wednesday, up 31% year-to-date.
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