[Note: Home Depot fiscal year ends January]
After a 28% decline year-to-date, at the current price of around $300 per share, we believe Home Depot’s stock (NYSE: HD), the world’s largest home improvement retailer, could see a rebound. HD stock has declined from around $410 to $300 YTD, underperforming the broader indices, with the S&P falling about 16% over the same period. The company’s stock traded lower as anxiety over a potential recession and difficult operating environment characterized by record inflation, supply chain challenges, and rising interest rates have plagued the entire retail space. Despite these macro headwinds, the company saw continued interest from consumers and reported better-than-expected second-quarter results, while reaffirming its full-year guidance. The company lowered selling expenses at a time when many rival retailers exhibited higher operating costs. It also grew its earnings per share 12% year-over-year (y-o-y) in Q2, when many competitors reported declining profits. With a current price-to-earnings ratio of around 18, which is much below the trailing 10-year average multiple of 23, it looks like Home Depot stock still has room for major expansion.
In Q2 (ended July 31), Home Depot retailer’s revenue was up 6.5% y-o-y to $43.8 billion, as comparable sales for the quarter rose 5.8% systemwide and 5.4% in U.S. stores. In addition, the home improvement retailer’s earnings climbed nearly 12% y-o-y to $5.05 per share. That said, both its top and bottom line numbers represented new all-time records for the company – despite facing inflation and strong comps results from last year. While digital sales increased only 12% y-o-y, its still is a vital ingredient of the retailer’s overall growth formula. It should be noted that the company’s average amount per sale increased by 9% y-o-y but transactions decreased by 3%. This means Home Depot was able to pass the inflation-related price hikes on to resilient customers.
We have revised Home Depot’s valuation to $324 per share, based on a $16.57 expected adjusted EPS and a 19.6x P/E multiple for the fiscal year 2022 – almost 9% higher than the current market price. We forecast Home Depot’s Revenues to be around $157 billion for the fiscal year 2022, up around 4% y-o-y. In light of rising interest rates and the threat of recession, the market at the moment is uncertain, but any further decline in the company’s stock could be used as an opportunity to buy the stock. The home improvement market is vast and the U.S. market could touch $620 billion by 2025, up from $538 billion in 2021. While the U.S. home sales declined nearly 6% in July to a two-year low due to the current challenging environment, Home Depot customers have always demonstrated that home improvement is in high demand regardless of the situation.
In 2022, Home Depot’s management expects sales growth of 3% y-o-y to around $156 billion and same-store sales to increase by 3% compared to 2021. Earnings growth is likely to slow to a mid-single-digit percentage which is still impressive given that it’s on top of the double-digit annual gains registered in fiscal 2020 and 2021. In addition, its operating margin is projected to be 15.4%, the same as last year.
It is also helpful to see how its peers stack up. Check out how Home Depot Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
With inflation rising and the Fed raising interest rates, Home Depot has fallen 28% this year. Can it drop more? See how low can HD stock go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
|S&P 500 Return||1%||-16%||79%|
|Trefis Multi-Strategy Portfolio||2%||-14%||241%|
 Month-to-date and year-to-date as of 9/9/2022
 Cumulative total returns since the end of 2016
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