Home Depot Stock Poised For Gains?

HD: Home Depot logo
Home Depot

[Note: Home Depot fiscal year ends January]

After a 25% decline year-to-date, at the current price of around $308 per share, we believe Home Depot stock (NYSE: HD), the world’s largest home improvement retailer, could see a rebound. HD stock has declined from around $409 to $308 since the beginning of 2022, larger than the 13% decline in the S&P index. This was largely due to higher interest rates, inflationary pressures, supply chain shortages, and the recent sell-off where retail companies reported a shift in consumer discretionary spending. But the company’s fiscal first-quarter results (which ended on May 1) could be seen as a silver lining here. Home Depot beat expectations with a strong report allowing it to raise guidance for the full year. In spite of last year’s soaring results, the company reported a rise in revenue and profits in the first quarter. To add to this, the home improvement giant’s comparable-store sales still rose 2% in Q1 2022 – on top of a 31% spike a year ago – even with an 8.2% decline in its customer traffic.

There are two reasons for this outperformance. Firstly, Home Depot reported an 11.4% increase in average spending per visit, which made a major difference. The average consumer spent $92 every trip, up from $82 a year ago and $75 in early 2020 – largely due to the price hikes resulting from the current decade-high inflation. Secondly, the retailer continued to gain business among professional contractors. Clients in this niche typically spend more than $1,000 per visit, and their growth has consistently been faster than the growth in the do-it-yourself segment.

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Home Depot’s Q1 revenue increased 4% y-o-y to $38.9 billion, and earnings per share (EPS) increased 6% y-o-y to $4.09. Consumers view spending on their homes as an investment when home prices are rising, as they are now. The company earned an operating profit margin of 15.4% in Q1, suggesting no major supply chain or pricing challenges. That said, the company also expects the 15.4% operating margin to persist for the rest of the year. For full-year 2022, Home Depot now anticipates full-year sales and comps growth of 3% each, with earnings per share growing by mid-single-digit percentages. Earlier in February, the company predicted flat to slightly positive comps for 2022.

We forecast Home Depot’s Revenues to be $156.8 billion for the fiscal year 2022, up 4% y-o-y. Looking at the bottom line, we now forecast earnings per share (EPS) estimate to come in at $16.57. Given the changes to our revenues and EPS forecast, we have revised Home Depot’s Valuation to $322 per share, based on a $16.57 expected EPS and a 19.5x P/E multiple for the fiscal year 2022. That said, the company’s stock appears cheap at the current levels, with a modest 4% premium to the current market price.

Rising gas prices, lumber prices, and interest rates, together with inflation, could likely affect consumers in the upcoming quarters. The company is already passing on the high costs to its customers through price hikes, which is seen as the declining traffic and increasing spending trends during Q1. Home Depot may further raise prices if inflation remains as is or even rises further. In such a case, it is likely that the broader markets may see lower levels in the near term. And, a further dip in HD stock can be used as a buying opportunity for better gains in the long run.

Here you’ll find our previous coverage of Home Depot stock where you can track our view over time.

While HD stock looks poised for more gains in the future, it is helpful to see how its peers stack up. Check out how Home Depot’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns May 2022
MTD [1]
YTD [1]
Total [2]
 HD Return 1% -27% 126%
 S&P 500 Return -2% -15% 81%
 Trefis Multi-Strategy Portfolio -3% -19% 218%

[1] Month-to-date and year-to-date as of 5/27/2022
[2] Cumulative total returns since the end of 2016

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