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HDS May Consolidate Before It Springs Into Action

Jan. 10, 2019 7:45 AM ETHD Supply Holdings, Inc. (HDS)
Badsha Chowdhury profile picture
Badsha Chowdhury


  • HDS’s primary value drivers are stable-to-strong.
  • Recent tariff hike increases costs, which is driving up prices for its offerings.
  • The company is investing in a technology-based distribution channel.
  • Strong shareholder returns through share repurchase programs.
  • Revenue and margin may fall in Q4, but look to recover in 2019.

HDS: Short term versus long term

HD Supply Holdings (NASDAQ:HDS) distributes industrial distributors to the contractors, maintenance professionals, homebuilders, industrial businesses, and government entities in North America. I expect the low unemployment rate and foreclosure rate to push HDS’s sales growth in 2019 unless the economy is hit by unforeseen events. The current headwinds for HDS are the tariff hike-linked cost inflation, which can erode its operating margin in the near term.

Some geographic regions in the U.S. witnessed weak new home construction in the past years, which can result in lower revenues in the short term. I expect limited upside in HDS’s stock price given these challenges but should consolidate and strengthen in the medium to long run. In the past year, HD Supply’s stock price has gone down by 5%, while the SPDR S&P 500 ETF (SPY) declined by nearly 8%.

What are the facets of HDS’s business?

HD Supply Holdings’ primary activities include providing construction, maintenance, repair and operations (or MRO) and specialty construction services. Through the Facilities Maintenance business unit, it serves multifamily, hospitality, healthcare, and institutional customers. These facilities typically require maintenance as well as repair and remodeling activities. Its business model is distribution center-based. The MRO-based business provides stable demand, particularly in a challenging economic environment, when new construction tends to decrease. So, it demands we throw some light on the construction market – the primary driver in this segment.

According to data provided by the U.S. Census Bureau, new privately-owned housing units increased 6.2% in 2017 from 2016. The number of units was relatively weak until August 2018 but has improved since then until November. According to edzarenski.com, non-residential buildings construction spending is expected to remain muted in 2019, increasing by 0.4% compared to 2018. In 2020, it is likely to grow by 9.4%. Residential construction spending

This article was written by

Badsha Chowdhury profile picture
I have more than 14 years of experience in analyzing and writing on stocks. I write on both long and short sides in an unbiased manner. I have been covering the energy sectors for the past 7 years, with the primary focus on the oilfield equipment services sector. I also cover the Industrial Supply industry. I occasionally co-author with Seeking Alpha contributor Thomas Prescott.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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