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Analysts Expect Strong Quarter for HD Supply

Analysts expect HD Supply to post solid quarterly results, with predictions of an 8 to 9 percent organic sales growth rate, compared to the company’s guidance range of 5 to 10 percent, the Street’s consensus of 7.5 percent and a Q1 sales growth rate of 5.5 percent. Adjusted EBITDA is expected to be more than $250 million considering the company’s strong operating leverage, while the Street’s consensus is $248 million. This prediction is based on the company’s solid sales performance in May continuing in June and July. Analysts feel the ADS gains of 9.6 percent in May were more due to better end-market activity and growth schemes rather than winter playing catch-up. Analysts feel that the company’s conservative estimates for May were 200 basis points higher than expected due to the weather.
Most distributors claimed the effects of the weather catch-up were limited and under what they expected. The effects were also limited to the end of March and April, which means May sales could be reflecting actual demand. This leads analysts to believe that June and July could see gains of 8 to 9 percent. Interline Brands results also indicated that institutional and multi-family markets improved in June. Thus, an EBITDA operating leverage of 1.7 to 1.8 times this quarter is expected. Recent residential softness or quicker growth in segments with lower margins could limit the upside. The company’s management published overall 2014 guidance forecasting sales of $9.1 billion with an EBITDA higher by 10 percent to 14 percent, i.e. between $844 million and $871 million.

The Street consensus is $9.1 billion in sales and an EBITDA of $876 million. After Q2 results are posted, analysts think the company will revise the lower end of the range to higher figures. They might not change the top end of the range as they may want to remain conservative and because growth in the residential end-market is likely to be less than expected. Analysts feel that the forecasted 300 basis points of outgrowth for this year could be higher. On the last conference call, the company’s management said that there seemed to be an increase in construction activities and that HD Supply Waterworks was showing a better backlog trend.

Analysts feel that the power solutions segment would see higher profitability as a result of restructuring. HD Supply is considered attractive on late-cycle infrastructure and non-residential construction. EBITDA growth is expected to be close to the peer group’s top for 2014 and 2015, with consensus seeing growth in the mid-teens for 2014 and 2015. HD Supply has proven to take market share and the company has impressive operating leverage. Thus, analysts see a stock price in the mid $30s, if the construction market sees reasonable recovery, and based on an EBITDA multiple of 11 times for FY2015 as well as net operating loss value of $4 per share.

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