Home Depot makes another bet on pro customers. Why Jim Cramer has reservations about the move

CNBC

30-06-2025

Home Depot is going back to the acquisition well in its bid to capture more spending dollars from professional contractors. The news The home improvement retailer announced Monday that it is acquiring GMS, a building materials distributor that specializes in products such as drywall, steel studs and insulation . Under the agreement, Home Depot's subsidiary SRS Distribution will buy all of GMS' stock for $110 per share for a total of $4.3 billion. Including net debt, the deal gives GMS an enterprise valuation of $5.5 billion. Shares of Home Depot were fell by roughly 0.5% Monday. GMS shares jumped nearly 12% on the news to $108.70, getting close to the deal price. Home Depot said the transaction, which is expected to close by the end of its ongoing fiscal 2025, will be funded using cash on hand and debt. Nevertheless, Home Depot said it still intends to reduce its leverage ratio — as measured by debt to EBITDAR — to 2 by the end of fiscal 2026. EBITDAR is short for earnings before interest, taxes, depreciation, amortization and restructuring or rent costs. Home Depot took on debt to fund last year's acquisition of SRS, and accordingly, the company paused stock buybacks to make paying down debt a higher priority. Home Depot said GMS will be a positive contributor to adjusted earnings per share growth in the first year post-closing. Big picture Home Depot beat out billionaire Brad Jacob's QXO in the quest to acquire GMS. It was a little more than a week ago that Home Depot had reportedly put in a bid to buy its fellow Georgia-based company following an unsolicited $5 billion cash proposal by QXO. There was speculation of a forthcoming bidding war until QXO said it would not be raising its offer. QXO acquired Beacon Roofing Supply in April. Owning GMS pushes Home Depot further into the world of professional customers following the purchase of SRS last year, in an even larger transaction valued at $18.25 billion including debt. Home Depot's decision to buy SRS — which specializes in the pool, landscaping, and roofing space — was considered an aggressive move to gain market share among specialized contractors. On its last earnings, Home Depot executives said they were "super pleased with SRS's performance." It also comes at a time when Home Depot's business serving do-it-yourself customers has been weighed down by subdued activity in the housing market. GMS has over 300 distribution centers in the U.S. and Canada, expanding SRS's ability to service more professional contractors and provide more fulfillment options. The combined GMS and SRS network will have more than 1,200 locations and over 8,000 trucks "capable of making tens of thousands of jobsite deliveries per day," SRS CEO Dan Tinker said in a press release Monday. When Home Depot's interest in GMS first surfaced in the media, RBC analysts said the then-rumored deal could be seen "slightly negatively" as it furthers gross margin dilution and delay the restart of share repurchases. Bottom line Home Depot's increasing focus on the pro customer makes a lot of sense. However, the timing of the GMS deal is questionable in Jim Cramer's mind. "I did not favor this deal," Jim said during Monday's Morning Meeting. "I want Home Depot to buy back its stock," he said. With shares struggling to find their footing due to the subdued housing market, Jim said, "I think the stock is very, very cheap." To be sure, the Club recognizes that Home Depot said buying GMS doesn't change its plans to return to its targeted leverage ratio of 2 by the end of next fiscal year – something executives have said they want to do before starting up buybacks. But Portfolio Analyst Zev Fima said it is fair to wonder whether the company could be more aggressive in paying down debt given its timeline is unchanged despite using debt to fund the GMS deal. Fima said another option would be to simply restart buybacks before the targeted leverage ratio is reached and before mortgage rates retreat — the reason is that both of those are catalysts that we would expect to boost the currently depressed share price. We think it would be better to fire up the buyback again ahead of that. In any case, we still see Home Depot as an eventual winner once rates fall and activity in the housing market picks up. That thesis has taken longer to play out than expected when we initiated a position in Home Depot in September 2024 , but we see it as being delayed — not destroyed. (Jim Cramer's Charitable Trust is long HD. See here for a full list of the stocks.) 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