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Guggenheim downgrades Home Depot, says business investment will prevent margin expansion

CNBC logo CNBC 9/17/2019 Maggie Fitzgerald
  • Guggenheim downgraded shares of Home Depot to neutral as the firm expects the home improvement retailer's business investments to weigh on margins.
  • "We find it difficult to see a path to EBIT margin expansion in 2020 as both a) investment spending and b) the associated D&A drag are poised to ramp," said Guggenheim analyst Steven Forbes in a note to clients on Tuesday. 
  • The firm lowered its 2020 earnings per share estimates for Home Depot to the lower-end of the consensus range.
a person standing in front of a box: An employee wears an orange Home Depot Inc. apron at a store in New York.© Provided by CNBC LLC An employee wears an orange Home Depot Inc. apron at a store in New York.

Home Depot's massive investment plan is preventing margin expansion, according to Guggenheim.

The firm downgraded the home improvement retailer's stock to neutral and removed its $230 price target.

"We find it difficult to see a path to EBIT margin expansion in 2020 as both a) investment spending and b) the associated D&A drag are poised to ramp," said Guggenheim analyst Steven Forbes in a note to clients on Tuesday.

Home Depot kicked off its $5.4 billion investment plan in 2017, as the company works to invest across stores, online and supply chain segments. Although the plan is going well, some spending has been pushed to 2020 and capital expenditures are going to ramp next year and ultimately prevent margin expansion, Forbes said.

Shares of Home Depot ticked more than 1% lower in extended trading following the downgrade on Tuesday.

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Guggenheim estimates the investment expenses in 2020 will have a 20 to 40 basis point hit to EBIT margins. Plus, operating expenses will also be an EBIT margin headwind in 2020, said Forbes.

"Bottom line, while we don't necessarily expect HD to deliver a 2020E EBIT margin below the low-end of management's stated guidance range, we do view current consensus expectations as aggressive given the potential impact," said Forbes.

The firm lowered its 2020 earnings per share estimates for Home Depot to the lower-end of the consensus range.

Shares of Home Depot are up nearly 35% since January.

—with reporting from CNBC's Michael Bloom.

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