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Saturday, April 30, 2011

Home Depot Looks A Bit Too Pricey?

Home Depot Looks A Bit Too Pricey?

Home Depot is the world’s largest retailer of home improvement products primarily competing withLowe’s in this business. This past winter unleashed brutal snowstorms across the Midwest and East Coast and current storms throughout the Midwest and Southeast will lead home owners to purchase home improvement supplies for maintenance and repairs.
Harvard University’s Joint Center for Housing Studies expects spending on home remodeling to rise 9.1% in the first quarter to $125.1 billion from the same period a year ago. [1]
Given that home improvement activity across the U.S. is picking up with the recovery in macroeconomic conditions in addition to needs arising from unusually harsh weather, Home Depot should report continued improvements in its plumbing, electrical & kitchen units. We have a$35.61 price estimate for Home Depot, which is slightly below the current market price.
Home Depot’s Plumbing, Electrical & Kitchen market share
Home Depot generates a significant amount of value from its plumbing, electrical & kitchen division. We estimate that this division contributes around 31% to our price estimate for Home Depot. The company was able to maintain its market share in this category, even during the recent economic downturn.
High penetration levels in most U.S. markets enabled Home Depot to offset its losses from the hard-hit housing markets such as southern California and Florida. We estimate Home Depot’s market share in this segment to be around 22% currently and to remain roughly at current levels throughout our forecast period.
The improvement in the outlook for home remodeling should benefit Home Depot and help it to sustain market share. If the market share increases to 25% by the end of our forecast period, it would result in an upside of around 3% to our current price estimate. In other words, a 1 percentage point increase in market share would add around 1% to our price estimate.

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