Wall St comes to Home Depot’s defence after Amazon-Sears deal

Wall Street has come to the defence of Home Depot, America’s biggest home improvement chain, after worries over competition from Amazon knocked billions from its market market value on Thursday in a matter of minutes.

After news that Sears, the beleaguered retailer, had struck a deal to sell its proprietary Kenmore appliances through Amazon, traders fled shares of Home Depot, its rival Lowe’s, and Best Buy — all groups that sell similar products. The abrupt move sapped some $13bn from the market value of the trio, underscoring investor anxiety of the pact.

It also represented a setback for the Street, which is quite bullish on Home Depot. In a Bloomberg survey of analysts, 20 have “buy” ratings, and none hold “sell” ratings. The median price target for Home Depot is about $174, a mark that has become more difficult to hit after a $6.10 decline on Thursday brought the price to $147.24.

From the looks of it, though, the sell-side has not fled the bull camp, with a parade of investment bank analysts having issued notes to their clients advising them to remain calm.

“We are buy rated on both Home Depot and Lowe’s and are buying this dip,” said Stifel analyst John Baugh. He adds that “when asked months ago about the desire to buy the Kenmore name, the CEO of Home Depot stated emphatically they had no interest. ”

Christopher Horvers at JPMorgan Chase also advises buying the Home Depot dip, saying that “the cache of Kenmore is gone … and thus we don’t think this has a material impact on Home Depot’s, Lowe’s and Best Buy’s [market share] capture ability.”

Brian Nagel of Oppenheimer offered a similar perspective, saying that the deal would be “more likely to keep Kenmore alive, even as Sears continues to falter, than pump new life into the legacy brand.”

At RBC Capital Markets, Scot Ciccarelli is also sceptical about what he sees as an “exaggerated” reaction to a “relatively modest incremental risk”. He adds:

The Kenmore brand/image has been heavily damaged over the last several years. Historically, consumer impressions regarding brand quality change at a glacial pace. So even with the positive aura that Amazon distribution may provide, we find it hard to believe there will be much of a change in the product’s sales trajectory.

Most white goods (think washers, dryers, dishwashers and typically refrigerators) still need to be installed by specialists. These are not typically [do-it-yourself] purchases. The solution here is that Sears Home Services would provide the installation, but Sears is an even more damaged brand than Kenmore, which may make consumers hesitant to use the service.

Peter Benedict of Robert W. Baird also reckons the sell-off for Home Depot and Lowe’s represents a “buying opportunity.” He notes that Home Depot’s market value decline represents more than 100 per cent of annual appliance sales.