Skip to Content
Stock Analyst Update

HD Supply Poised for Continued Growth in 2017

The narrow-moat industrial distributor's salse growth trajectory for fiscal 2017 is off to a strong start.

Mentioned:

We are maintaining our $33 per share fair value estimate after incorporating  HD Supply’s (HDS) fiscal fourth-quarter results into our valuation model. The narrow-moat industrial distributor finished its fiscal year on a high note with fourth-quarter sales and earnings both topping prior-year actuals and consensus estimates. Fourth-quarter sales increased 3.2% to $1.634 billion (versus $1.629 billion consensus), while adjusted EPS increased $0.17 per share to $0.44 per share (versus $0.43 consensus). HD Supply’s sales growth trajectory for fiscal 2017 is off to a great start with preliminary February sales up more than 6% year over year. Still, the company’s shares edged lower after its earnings release, which we think was mainly due to the company’s soft first-quarter EBITDA guidance of $212.5 million at the midpoint versus $215 million last year.

All of HD Supply’s segments contributed to the company’s sales growth during the fourth quarter. Construction and Industrial sales were up 4.3%, Waterworks sales were up 3.4%, and Facilities sales were up 2.3% over the year-ago quarter. Consolidated EBITDA margin declined 20 basis points to 10.3% as Construction and Industrial margin expansion (up 100 basis points year over year) was more than offset by margin compression within the company’s other segments.

HD Supply’s free cash flow generation improved substantially in fiscal 2016, coming in at $432 million versus $336 million. The company made progress on reducing its leverage by paying down $200 million on its outstanding term B-1 loans ($639 million remains).  Although HD Supply’s net leverage remains elevated at about 4 times fiscal 2016 EBITDA, we think the company will continue to utilize its growing free cash flow to pay down debt, and we estimate the firm will reach its target net debt/EBITDA ratio of below 3 times by early 2018.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Brian Bernard does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.