SunTrust: Why HD Supply Could Hit $48 Per Share

Shares of HD Supply Holdings Inc (NASDAQ: HDS) have lost more than 8 percent over the past year, but the bullish case for owning the stock can now be made, according to SunTrust.

The Analyst

SunTrust Robinson Humphrey's Keith Hughes upgraded HD Supply Holdings' stock from Hold to Buy with a price target lifted from $42 to $48.

The Thesis

HD Supply's stock is trading at a valuation that is simply "too low" at 10.7 times EV/EBITDA or 12.2 times P/E on 2018 estimates, Hughes said in a report. There are three compelling reasons to be made as to why the stock warrants a higher valuation.

• Hughes $48 price target implies a multiple that would place HD Supply's stock in the upper middle of 13 of its most comparable peers. On the one hand, a sum-of-the-parts analysis with different valuations assigned to each business unit implies the stock warrants a higher valuation. Alternatively, a spin-off of the C&I business could also close the valuation gap.
• HD Supply's Facilities Maintenance business boasts one of the best margins within the entire distribution space and its margin profile is sustainable over time, the analyst said. From 2011 to 2014 the unit's contribution margins were in the 25 percent range and could return to these levels from the posted 20 percent in a "very mixed" 2017.
• The company has faced unfavorable comps which helped weigh on the stock but looking forward the comps will ease.

Price Action

Shares of HD Supply Holdings were trading higher by less than 1 percent Thursday at $38.19.

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