A couple of analyst updates have highlighted that Home Depot (HD -0.97%) is one of the most fascinating stocks on the market. Here's some information investors should consider before buying the stock.
Not all analyst updates are equal
Jefferies reinstated coverage of Home Depot and immediately slapped a $426 price target on the stock, along with a buy rating. The analyst cited the recent acquisition of residential specialty trade-distribution company SRS Distribution for an enterprise value of $18.25 billion. The price target implies a 16% upside to the current price.
Stifel, on the other hand, gave the company a price-target upgrade from $374 to $380, which implies less than 4% upside and comes with a hold rating. The Stifel analyst cut earnings estimates for Home Depot in 2024 and 2025, due to the integration of SRS.
At the time of the deal announcement, Home Depot's management said, "This transaction is expected to be dilutive to earnings per share [EPS] from a GAAP perspective due to amortization expense, but accretive from a cash EPS perspective in the first year, post-closing, excluding synergies."
In reality, investors will care more about cash EPS than the amortization of intangible assets due to the acquisition. Moreover, Home Depot's management is trying to improve its position with residential professional customers.
The investment case for Home Depot
The analyst commentary highlights the bull and bear debate over Home Depot's stock. The bearish view is characterized by concerns about the company's exposure to the housing market and relatively high interest rates.
Image source: Getty Images.
Meanwhile, the bulls believe the housing market will inevitably turn, along with the interest-rate cycle, and the acquisition is an excellent strategic fit made at the right time.
While there's much to be made of the latter view, Home Depot's valuation doesn't suggest an investor is getting great value. For example, the stock trades on more than 22 times Stifel's pre-acquisition estimate for earnings in 2025. That's a bit rich, and there are many other housing-related stocks to buy at better valuations.
