HD Supply -- Tons of Upside Ahead of Earnings Despite 52-Week High

NEW YORK (TheStreet) -- It's been tough sledding for several retailers this earnings season, especially those showing chinks in their armor by offering weak business outlooks. That's not what investors want at a time when pundits are calling for a 10% market correction at every opportunity.

Although shares of HD Supply Holdings (HDS) aren't cheap, trading at near record highs and up more than 12% on the year, it would be a colossal mistake to part with this winner ahead of its fiscal first-quarter earnings results Tuesday due out before the opening bell.

HD Supply, an industrial products supplier, was spun out of Home Depot (HD) in 2007 and went public in June 2013. The company, based in Atlanta, has been a solid operator, posting six consecutive quarters of earnings beats. During that span, only once has HDS missed Wall Street's revenue targets.

The company, whose shares have skyrocketed more than 60% since its initial public offering, continues to benefit from a rebound in both residential and commercial construction, which is driving growth in all four of its major business segments. But it's not just about revenue growth.

Although HDS is relatively new as a public issue, the company's mindset remains on profitability, as evidenced by the continued uptrend in its gross profit margins, which has climbed steadily by an average of 10 basis points in each of the past three quarters.

What do you get for this performance? Aside from a stock, that's up almost 80% in the past three years, almost doubling the 42% gains in the Dow Jones Industrial Average (DOW), you get a company that is already one of the largest industrial distributors in the U.S. with annual sales of $8.5 billion.

Even better, based on its average analyst earnings projections of $2.48 for fiscal year 2016, this means -- at around $33 per share -- HDS stock trades at just 13 times forward earnings estimates. That's four points lower than the average S&P 500 company.

So why would you not want to own this stock, especially given HD Supply's ability to drive higher sales and make money for its shareholders? To borrow a quote from superstar activist investor Carl Icahn, this is a no-brainer.

It would seem the average analysts agree, given that HDS stock, which has an average 12-month price target of $35, also has a consensus "Buy" rating. The implied gain of 5.5% from current levels is nothing to brag about. But consider, assuming HDS earns its projected 2015 full-year earnings of $1.90 per share, this means next year's target of $2.48 calls for growth of more than 30%.

And given the rate at which HDS has beaten its earnings targets, it's possible analysts will continue to underestimate what the company might be able to deliver next year.

This means at some point, consensus estimates will have to catch up to the company's actual performance, translating not only to higher revenue/earnings projections, but also higher price targets. And how do you capitalize on the price target increases? You own the shares today.

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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