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Stock Strategist

We See Growth Building for HD Supply

The company has successfully capitalized on its scale and expanding network of customers.

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We think it is an exciting time for  HD Supply (HDS), now that the company has finally rightsized its balance sheet and narrowed its focus on its most profitable facilities maintenance business. Operating with an EBITDA leverage ratio below 3 times, HD Supply has the flexibility to operate a more balanced capital-allocation strategy, which we think will include continued buyback activity as well as strategic acquisitions. Management spent some time during last month’s earnings call discussing the profile of a potential target. We were relieved to hear that it is not interested in large, transformational deals, but rather tuck-in-size deals that are extensions of HD Supply’s current business model.

HD Supply traces its roots to Maintenance Warehouse, a maintenance product distribution company founded in 1974. Over the subsequent two decades, Maintenance Warehouse continued to grow and Home Depot eventually acquired it in 1997. In 2007, Home Depot sold HD Supply to private equity investors for $10.3 billion. After operating under private equity ownership for over five years and amassing a significant amount of debt, HD Supply completed its initial public offering in 2013. Since the IPO, HD Supply’s management team has kept a steadfast focus on repairing the balance sheet and has significantly reduced the debt load. On Aug. 1, 2017, HD Supply completed the sale of its $2.6 billion Waterworks segment for a net $2.4 billion. The company intends to use a portion of the proceeds to pay down approximately $2 billion of debt, which will allow it to reach its targeted gross debt/EBITDA ratio of below 3 times. It also purchased $500 million worth of shares and authorized an additional $500 million buyback program.

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

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