'Pretty Powerful Backdrop' Ahead for Home Depot: Pro
Despite a more than 65 percent rise in Home Depot's stock during the past year, one analyst says the home improvement retailer's valuation does not concern him.
"I will agree that the valuation looks expensive if you look at a historical multiple," said Peter Keith, a senior research analyst at Piper Jaffray. "But if you're looking back at the past five years, you're looking at a very depressed housing market, and so I don't think that's a really relevant valuation characteristic."
Keith told CNBC's "Squawk on the Street" that he has an "overweight" rating and a $70 price target on the company's shares.
In what Keith described as a "double positive" for the company, discretionary spending on homes seems to be picking up while the housing recovery becomes a tailwind.
On Tuesday, the company raised its full-year outlook and beat earnings estimates as it benefited from gains in the U.S. housing market and cost-cutting measures.
"They've been saying that for a couple of years that they think GDP is what's driving their business, but you are starting to see the CEO admit that housing's become a bit more of a tailwind," he said.
This will be a "pretty powerful backdrop for them going into next year," Keith said.
He added that larger-ticket remodeling projects are bouncing back at the company — a trend that is benefiting its flooring, kitchen and bath segments.
"The two stocks that we cover that would be benefiting from those types of sales would be Lumber Liquidators and Tile Shop so I would look at those that have been weak and are now starting to bounce back more recently," he said.
Also appearing on the show, Dan Binder, a senior equity research analyst at Jefferies, said the stock's performance reflects a lot of good news already.
Binder has been recommending the stock at one point coming out of the recession, but valuation became rich. He now maintains a "hold" rating and a $56 price target on the company's shares. Despite the hold rating, he still prefers Home Depot over Lowe's.
"Our call into the print was to own a Home Depot over Lowe's, " Binder said. "We still think they are outperforming and doing the best job in the sector."
—By CNBC.com's Katie Little; Follow her on Twitter @katie_little
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Piper Jaffray makes a market in the securities of Home Depot and Lowe's and will buy and sell the securities on a principal basis. Dan Binder does not own shares of the companies mentioned in this article.