Note: Home Depot FY’23 ended on January 28, 2024.

Home Depot Faces Challenging Market as Stock Marginally Declines

Market Performance and Recent Results

Home Depot stock (NYSE: HD), the world’s largest home improvement retailer, experienced a slight decline of 1.3% on Tuesday, November 12 (to $403). This drop contrasts with a smaller 0.3% decline in the S&P 500 index. Over the same period, Lowe’s (NYSE: LOW) saw a 1.7% decrease, bringing its stock to around $270.Despite this, Home Depot reported better revenue growth in Q3, attributed to hurricane-related activity and increasing demand in hard-hit areas. However, it did see a fall in net earnings.

The company’s net sales grew 7% year-over-year (y-o-y) to reach $40.2 billion, and adjusted EPS was $3.78, a decline of 4.3% y-o-y that still exceeded estimates.

Higher interest rates and economic uncertainty have made consumers more cautious, leading to a 1.3% drop in comparable sales during the third quarter. This change in consumer behavior has negatively affected foot traffic and slightly lowered average transaction values to $88.65 in Q3 2024, highlighting budget constraints among shoppers. Additionally, the company’s operating margin dipped by 800 basis points y-o-y to 13.5%. This decrease stems from increased supply chain investments aimed at supporting online orders.

Impact of Interest Rates on Home Sales

The Federal Reserve’s efforts to combat inflation by raising interest rates since 2022 has led to an increase in mortgage rates, thereby dampening home sales. After reaching a peak of 7.08% in November 2022, mortgage rates have begun to decrease, with the current average for a 30-year fixed-rate mortgage at 6.79% as of November 11, compared to 6.08% a year prior.

Long-Term Prospects and Stock Volatility

Falling home prices might temporarily affect Home Depot, yet the company may see benefits in the long run. With over 2,300 locations, Home Depot earns more from professional contractors than Lowe’s does. This diversity could buffer against reduced spending in DIY projects. It’s likely that homeowners will continue to invest in property maintenance. Additionally, declining interest rates could ease the burden on home buyers facing high mortgage expenses, potentially encouraging more construction as homebuilders face reduced borrowing costs.

The stock’s performance over the past three years has varied significantly. Home Depot’s returns include 60% in 2021, a drop of 22% in 2022, and a gain of 13% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, a collection of 30 stocks, has been considerably less volatile and has outperformed the S&P 500 every year within this period.

Company Guidance and Future Expectations

Home Depot’s management forecasts a 2.5% decline in comparable sales for FY 2024. Nevertheless, the company expects total revenue to rise by 4%, driven by acquisitions and infrastructure improvements. They anticipate that margin pressures will contribute to a 2% decline in EPS by year-end.

Valuation and Comparison with Peers

Our revised valuation for HD stands at $404 per share, based on an expected EPS of $14.84 and a P/E multiple of 27.2 for fiscal year 2024, nearly aligning with the current market price. Moreover, we project HD’s Revenues to reach $157.4 billion for fiscal year 2024, representing a 3% increase y-o-y.

For further insights, refer to Home Depot’s Peers to see how they measure up against crucial metrics. Additional comparisons across various industries can be found at Peer Comparisons.

[1] Returns as of 11/13/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.