The Bullish and Bearish Case for Home Depot in 2015

The Home Depot Inc. (NYSE: HD) closed out the 2014 at $104.97, for a gain of 30.2%, including its dividend adjustments. The 2014 trading range was $73.96 to $106.02, and the consensus analyst price target of $104.85 would imply a downside of less than 0.1% this year.

There is the dividend yield of 1.9% to consider too. Based on its closing price on December 31, Home Depot has a market cap of $138 billion.

24/7 Wall St. has undertaken a bullish and bearish case to evaluate both sides of the coin to see what lies ahead for Home Depot in 2015.

A key consideration for the year ahead is how much it ends up costing the company to deal with the massive data breach it reported in September of 2014. An attack on the company’s computer systems exposed 56 million credit and debit card numbers, and Home Depot said in its third-quarter earnings report that it does not know what the final cost for the breach will be, nor how long the costs will stretch out. Home Depot paid out about $34 million in the quarter related to the breach, and more than 40 lawsuits have been filed against the company.

Home Depot also has to consider the success its main competitor, Lowe’s Companies Inc. (NYSE: LOW) has had over the past year. Lowe’s has made serious efforts to turnaround, and those efforts paid off last year and are expected to continue paying off in 2015. Lowe’s sports a higher forward price-to-earnings (P/E) ratio than Home Depot, 21.26 vs. 20.38, and Lowe’s stock outperformed Home Depot’s last year, rising 39% compared with 28% at Home Depot.

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Home Depot’s market cap is more than double that of Lowe’s, and full-year 2013 revenues of $78.8 billion are nearly 50% higher than Lowe’s total of $53.4 billion.

After a dividend-adjusted performance of 30% in 2014, Home Depot’s total upside this year, with the dividend included, is expected to be roughly 1.7%. Lowe’s stock, which traded at $68.80 on December 31, is fully valued compared with a consensus estimate of $68.88.

Analysts were looking for gains of about 6.45% from Home Depot in 2014, yet the home improvement and construction products retail giant did almost five times better than that. The new year may not be that outstanding.

The company marked prices way down on some items for the Black Friday weekend, perhaps as an inducement to customers who had stayed away after the data breach. We won’t know how severe the impact on revenues of the loss of customer records will be until Home Depot reports fourth-quarter results in late February.

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