HD Supply Offers Compelling Growth

The industrial supply distribution company that was formerly a subsidiary of Home Depot -- aptly named HD Supply Holdings (NASDAQ: HDS  ) delivered earnings this week to a delighted Wall Street. HD Supply continues to benefit from the turnaround in housing, both single-family and multiunit construction. The spin-off, on the market since late June of this year, has risen more than 23% in stock price, and has increased its prospective performance in the near future. For investors, HD Supply offers the DNA of its parent company at a stock price that, even with its substantial gains over the past several months, trades at a discount to the more scrutinized, popular Home Depot. Here's the latest on HD Supply.

Earnings up
HD Supply operates in several segments -- Facilities Maintenance, Waterworks, Power Solutions, and White Cap. Each segment saw gains in the quarter, and helped drive the company above estimates on both the top and bottom lines. Overall, net sales climbed by 7%, to $2.3 billion, it's 14th consecutive quarter of sales growth.

Gross profit climbed slightly more (8%) with an improvement in margins due to what management calls "category management initiatives." Operating income took a massive 40% leap, to $160 million, though this was due largely to an adjustment in depreciation and amortization expense. Down to the adjusted EBITDA level, the company gained 11% year over year, mainly due to the company's Crown Bolt purchase agreement with its former parent.

On the bottom line, HD Supply grew adjusted earnings by $65 million to $75 million -- or $0.38 per share.

By segment, Waterworks grew the most this quarter with a 14% improvement, followed by an 11% gain at White Cap, which is specialty construction hardware.

What it means
Management cited sluggishness in non-residential construction, as well as infrastructure projects, as challenges in the quarter. This is interesting considering the decent growth in nearly all segments. The company continues to achieve the coveted combination of organic sales growth along with acquisition growth. HD Supply is trying to serve as many levels of the construction market, commercial and noncommercial, that it possibly can.

The company is extremely well capitalized, and perfectly positioned for continued growth. Margins are looking better and better, and the long-term industry tailwinds will only help.

At its current valuation, HD Supply has certainly lost some of its value appeal from earlier months, but it remains appealing. German competitor WW Grainger still trades at a decent premium --19.8 times forward earnings compared to HD Supply's 16.6 times. With a well-tuned management team and a comfortable growth runway, this stock remains appealing to price-conscious growth investors.

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  • Report this Comment On December 15, 2013, at 10:00 AM, jw208 wrote:

    Excellent concise analysis. HDS is still somewhat under the radar which may not be so bad. Thanks Motley Fool.


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