2018 Bull/Bear Outlook: Will Home Depot Have to Fend Off Amazon This Year?

Print Email

Now that 2017 is over and 2018 has arrived, investors have to contemplate what to expect ahead. After all, this raging bull market is now nearing nine years old, and it has been the strongest bull market that most investors have ever seen. The Dow Jones Industrial Average (DJIA) rose 25% and the S&P 500 rose by almost 19.5% in 2017. Wall Street is by and large calling for tax reform and growth of earnings and gross domestic product to push the stock market gains in 2018.

24/7 Wall St. just came out with its annualized forecasting tool showing that DJIA at 26,400 and at least 2,855 on the S&P 500 are the baseline targets for 2018. For the Dow to make its targets, Home Depot Inc. (NYSE: HD) is going to have to do its part.

As far as what other strategists are calling for in the broader market, Credit Suisse is now targeting 3,000 and Oppenheimer is targeting 2,900 for the S&P 500 in 2018. At the end of 2017, the forward valuation for the S&P 500 Index was 18.5 times earnings to 19.0 times expected earnings per share per two main sources.

Home Depot stock rose by 41.4% in 2017, putting the home improvement store in a tie with McDonald’s as the sixth-best performing Dow stock last year. Home Depot closed 2017 at $189.53 a share, just below a 12-month consensus price target of $192.29. The company’s annual dividend is $3.56, for a yield of 1.88%. Total return to shareholders in 2017 was 44%.

In early December the company initiated a new $15 billion share buyback program, reiterated strong fiscal year guidance and announced targets for fiscal year 2020. While all these points were strong, they did not add up to a major boost to the share price.

Likely that was due to its valuation. The stock’s trailing 12-month price-earnings (P/E) ratio is 26.46 and its forward P/E is 22.71. That’s still solid, and Guggenheim analyst Steven Forbes is cited in Barron’s last month saying that his firm believes Home Depot is “well positioned for out-performance” in 2018.

The caveat, as with just about every other U.S. retailer, is whether Amazon.com Inc. (NASDAQ: AMZN) will take aim at the company’s market. The e-commerce giant has begun to sell furniture and appliances, the latter of which is a significant part of Home Depot’s business. Many analysts think Home Depot is well-insulated against an attack from Amazon, but the streets are littered with empty storefronts that held businesses targeted by the company. It’s unlikely that Amazon can sell 2×4s as effectively as Home Depot, but just the threat that Amazon might try could tamp down investor enthusiasm for Home Depot’s stock.

Home Depot has a 52-week trading range of $133.05 to $191.49 and a market cap near $220 billion. Its weighting in the Dow is 5.22%, and it ranks roughly 19th among the S&P 500 stocks.