We believe that HD Supply Holdings, Inc. is a solid choice for investors who are seeking exposure in the industrial services space. Healthy end markets for both the segments, benefits from acquired assets and gains from divestment will be advantageous for the company.

The stock, with roughly $7.1 billion market capitalization, was upgraded to a Zacks Rank #1 (Strong Buy) on Apr 7. Its investment appeal is further accentuated by a VGM Score of B.

HD Supply delivered better-than-expected results in two of the last four quarters while lagging estimates in one and delivering in-line results in one. Average earnings surprise was a positive 3.74%. Notably, its shares rallied 3.2% in the last month, outperforming 1% gain of the industry.



Why the Upgrade?

We are providing a snapshot of how HD Supply fared in the fourth quarter of fiscal 2017 (ended Jan 28, 2018). Its earnings of 49 cents surpassed the Zacks Consensus Estimate by 11.36%. Net sales were up 9% year over year on the back of healthy segmental performance of the Facilities Maintenance and Construction & Industrial segments.

A number of initiatives taken in fiscal 2017 will be fruitful for HD Supply in the current fiscal and so on. In this regard, investments directed toward the enhancement of selling channels in the Facilities Maintenance segment, as well as the opening of four new branches in key districts in the Construction & Industrial segment, are worth mentioning. Also, the company anticipates mid-single-digit growth in the residential construction market and low- to mid-single-digit growth in the non-residential market to boost the Construction & Industrial segment in fiscal 2018 while an approximate 1-2% growth in “Living Space” MRO will prove advantageous for the Facilities Maintenance segment.

In fiscal 2018, HD Supply anticipates approximately 2-3% year-over-year growth in its end markets. Net sales will likely increase 14% to $5,760-$5,910 million. Adjusted earnings before interest, taxes, depreciation and amortization (EBIDTA) will be within $815-$855 million, reflecting growth of 14% at the midpoint. Adjusted earnings are predicted to be $2.99-$3.21 per share, representing mid-point growth of 34%. Through Mar 12, 2018, the company is left to buy back roughly $445 million shares under its $1 billion program authorized in fiscal 2017.

Moreover, HD Supply’s focus on expanding its operations through meaningful buyouts will work in its favor. In March 2018, it completed the acquisition of A.H. Harris Construction Supplies. This buyout compliments the Construction & Industrial segment’s White Cap business and will expand its product offerings and customer base in the Atlantic regions, especially mid, south and northeast. In fiscal 2018, A.H. Harris assets will generate revenues of roughly $360 million while its EBITDA will be roughly $40 million and earnings per share accretion will be of 18 cents. Earlier in August 2017, the company successfully divested its Waterworks business unit. This move was intended to reduce debt, use the resources for growth investments and provide healthy returns to shareholders.

In the last 30 days, the company’s earnings estimates for fiscal 2018 (ending January 2019) were revised upward by eight brokerage firms while that for 2019 (ending January 2020) by four firms. The Zacks Consensus Estimate currently stands at $3.16 both for fiscal 2018 and fiscal 2019, reflecting an increase of 9.3% and 12.9%, respectively, from their respective tallies, 30 days ago.

Also, the company has a positive Earnings ESP of 0.33% for fiscal 2018 and 0.82% for fiscal 2019. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

HD Supply Holdings, Inc. Price, Consensus and EPS Surprise