The Home Depot, Inc. (HD), W.W. Grainger, Inc. (GWW): Are HD Supply Holdings Inc (HDS) Shares on Sale?

Since debuting on the public markets as a spinoff from home-improvement behemoth The Home Depot, Inc. (NYSE:HD), the industrial and construction-related distribution shop HD Supply Holdings Inc (NASDAQ:HDS) has largely delighted investors with a vertical stock price trajectory… until this week. Upon releasing its earnings, investors and analysts were disappointed by soft top-line sales — an important factor to justify the company’s relatively expensive valuation. Things got better further on down the income statement, but Mr. Market still punished the stock well into the double digits. The question now is, after the sell-off, is HD Supply a compelling play on the construction supply industry?

Earnings glance
In its first earnings release as a stand-alone public company, out from under the wing of either The Home Depot, Inc. (NYSE:HD) or private equity partners, HD Supply Holdings Inc (NASDAQ:HDS) was able to show its investors and analysts that margins had improved, and sales grew a respectable 10% to $2.3 billion. Operating income jumped an impressive 46%, while adjusted EBITDA climbed up 14%. On the bottom line, the company beat analyst expectations, bringing in a profit of $0.23 per share.

HD Supply Holdings Inc (NASDAQ:HDS)On a unit-by-unit level, investors can see what is really working for the company and, hopefully, where more growth can emerge. Facilities maintenance saw sales grow 12% and its adjusted EBITDA grew 15% to $125 million. Waterworks grew 14% and accounted for $50 million in adjusted EBITDA. Power solutions was the weakest segment, growing just 4% and representing $18 million in EBITDA, down from $20 million in the year-ago quarter. White cap, a segment that distributes specialized hardware and materials to construction markets, grew sales by 9% while adjusted EBITDA hit $24 million.

The most compelling area is facilities maintenance, which actually separates HD Supply Holdings Inc (NASDAQ:HDS) from some of its competitors. The FM segment is a much higher-margin business than, say, Waterworks and holds an appealing growth runway. The business revolves around supplying hardware and tools to multifamily housing units. However, management has expressed interest in expanding into other commercial applications.

Wall Street did not like the company’s guidance, which called for 2013 sales in the range of $8.55 billion to $8.75 billion and adjusted EBITDA of $755 million to $775 million.

At a glance, earnings weren’t so bad, even if guidance is a bit tepid, so what gives?