Investors should take advantage of the recent pullback and buy shares of Home Depot (NYSE:HD). So says Swiss investment bank Credit Suisse, which upgraded the home-improvement retailer's stock from market perform to outperform on Thursday.
Analysts at the bank say Home Depot's stock has an "attractive risk/reward" profile now that its price has fallen about 10% since its third-quarter earnings results in November.
Home Depot reported third-quarter revenue of $27.2 billion, which was slightly below Wall Street's expectations. CEO Craig Menear said that some of the company's growth investments were taking longer than anticipated to bear fruit.
"Our third-quarter results reflected broad-based growth across our business, yet sales were below our expectations driven by the timing of certain benefits associated with our One Home Depot strategic investments," Menear said in Home Depot's Q3 earnings release. "We are largely on track with these investments and have seen positive results, but some of the benefits anticipated for fiscal 2019 will take longer to realize than our initial assumptions."
In turn, Home Depot reduced its fiscal 2019 full-year comparable-store sales growth forecast from 4% to 3.5% and its overall revenue growth forecast from 2.3% to 1.8%. The company did, however, reaffirm its earnings-per-share guidance of $10.03, which represents growth of approximately 3.1%.
Then on Dec. 11, Home Depot provided a preliminary outlook for fiscal 2020 that also disappointed investors. Management guided for total sales growth of approximately 3.5% to 4%, while analysts were expecting 4.4% growth. Home Depot's operating margin guidance of 14% also fell short of consensus estimates.
A necessary reset
Now, however, Credit Suisse believes Home Depot's new guidance has sufficiently reset investors' expectations to where it can meet and even exceed them.
"Home Depot lowered fiscal year 2020 comps/margins yesterday to a level that now seems achievable, potentially beatable," Credit Suisse analyst Seth Sigman said. "Previously, guidance and expectations had been too high all throughout fiscal 2019."
Moreover, Credit Suisse says that the home-improvement titan's One Home Depot strategy -- which aims to tightly integrate its stores and websites in order to provide customers with a more seamless shopping experience -- should help to position it for long-term success.
"We firmly believe in this team, and the initiatives aimed to expand its reach to new customer segments and categories, while leveraging its stores, building a differentiated omnichannel and digital experience, and creating the fastest delivery network that will widen its moat over time," Sigman said.
As such, Credit Suisse predicts that Home Depot's shares will rebound to $235, or nearly 10% higher than today's prices.