Going Into Earnings, Is Home Depot Stock a Buy, a Sell, or Fairly Valued?

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Home Depot HD is set to release its first-quarter earnings report. Here’s Morningstar’s take on what to look for in Home Depot’s earnings and stock.

Key Morningstar Metrics for Home Depot

Earnings Release Date

  • Tuesday, May 14, 2024, before the start of trading

What to Watch for In Home Depot’s Q1 Earnings

  • We’ll watch management’s commentary on this year’s landscape to see whether its views on the overall housing or home improvement market have changed and if there are any shifts in the existing guidance.
  • Since we model a negative comparable store sales growth in its first quarter, we are curious to see whether the firm could defend its margins through cost containment measures and leveraging its scale.
  • Given the uncertainty around the timing or closure of the SRS Distribution acquisition announced in March, we’d be particularly interested to hear about any progress on this deal. In this context, we’d also like any update on the firm’s initiative to expand its complex pros business.

Fair Value Estimate for Home Depot Stock

With its 2-star rating, we believe Home Depot’s stock is overvalued compared with our long-term fair value estimate of $263 per share. For fiscal 2024, we expect roughly $154 billion in sales, a 14.1% operating margin, and $15.41 in earnings per share.

Given the maturity of the domestic home improvement industry, we expect demand to largely depend on changes in the real estate market, driven by prices, interest rates, turnover, and lending standards. We project 3.5% average sales growth over the next five years, supported by 2.7% average same-store sales increases and helped by offerings like buy online/pick up in-store and better merchandising, which drives market share gains.

Read more about Home Depot’s fair value estimate.

Economic Moat Rating

We assign Home Depot a wide moat rating. As the largest global home improvement retailer, Home Depot possesses a competitive edge owing to its brand intangible asset and cost advantage. Over the past 10 years, Home Depot’s sales growth has outpaced its industry’s average growth of 5.3% by 170 basis points annually. We surmise the company’s strong brand equity and extensive scale should enable incremental market share gains in the highly fragmented $950 billion North American home improvement market, on top of the 16% market share it has amassed thus far (given roughly $153 billion in sales in 2023).

Home Depot’s impressive same-store sales growth, which has averaged 6% over the past 10 years, suggests a brand intangible asset. Its extensive product offerings and services have fostered brand loyalty. The firm moves 30,000-40,000 stock-keeping units in store and 1 million online, allowing consumers to save time and effort by visiting one shop for all a project’s needs.

We believe Home Depot’s size (operating more than 2,300 stores throughout the United States, Canada, and Mexico) lets it manage large volumes and disperse merchandise across a geographically diverse network of stores to target specific markets, underpinning a cost advantage. The magnitude of the business enables significant bargaining power with vendors when sourcing products, crafting advertisements, and arranging logistics. We think the symbiotic relationships Home Depot maintains with its vendor partners are unlikely to be replicated easily, considering the current market landscape and the time and capital involved in scaling up.

Read more about Home Depot’s economic moat.

Financial Strength

Home Depot has had no concerns tapping the credit markets to finance the business in recent years. After nearly $2 billion of debt raised in 2023 (and roughly $1.3 billion in repayments), the firm ended January 2024 with a total debt load of around $43 billion. We aren’t concerned about near-term cash constraints, as forward debt maturities are staggered, with just $1.4 billion of debt maturing in the next 12 months. Moreover, EBIT is forecast to cover the net interest expense 12 times at the end of 2024.

Given Home Depot’s ability to generate tremendous free cash flow to the firm (we forecast more than $16 billion in 2024), we expect management will have no problem facilitating dividend payments and remaining near its long-term dividend payout ratio target of 55%. Share repurchases should continue, with the new $15 billion share repurchase program authorized in August 2023.

Read more about Home Depot’s financial strength.

Risk and Uncertainty

We give Home Depot a Medium Uncertainty Rating, owing to its strong brand recognition, which has helped stabilize sales through the cycle. Sales are largely driven by greater consumer willingness to spend on category goods, with stable existing-home price growth and decent turnover. Thanks to the maintenance, repair, and operations business, pro revenue could be less cyclical, as the maintenance side can prove more consistent. In uncertain economic times, consumers remain in their homes, embarking on improvement projects and boosting do-it-yourself revenue. Alternatively, when home prices rise, the wealth effect generates a psychological boost, reinvigorating professional sales thanks to a higher willingness to spend on big projects. A diverse consumer base helps normalize revenue even in uneven times. Currently, about half of sales are in the do-it-yourself arena, while the rest is generated from the pro customer.

We believe the biggest risk is a slowdown in the real estate market, signaled by increased home inventories for sale, slower price growth, or higher mortgage rates (up about 300 basis points over the last two years).

Read more about Home Depot’s risk and uncertainty.

HD Bulls Say

  • Home Depot’s continued investments in supply chain and merchandising should improve productivity and support its leadership in the home improvement market.
  • The company has returned $73 billion to shareholders through dividends and share buybacks over the past five years, nearly 20% of its market cap. In our outlook, we forecast Home Depot to return nearly $85 billion to shareholders over the next five years.
  • The addressable MRO market is around $100 billion, and Interline and HD Supply make up a low-double-digit share, leaving meaningful upside up for grabs.

HD Bears Say

  • Weak consumer spending, higher interest rates, or an economic downturn could hinder sales for home improvement projects and affect Home Depot’s growth.
  • IT and supply chain improvement gains could prove more challenging to achieve, as simpler efforts have already borne fruit. Further productivity efforts could face some implementation risks, creating inconsistent profitability.
  • As home improvement demand continues normalizing, consumers could shift discretionary spending away from home improvements into other discretionary categories.

This article was compiled by Liz Angeles.

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