Is Holding Home Depot Stock a Wise Call After Fed Trims Interest Rate?

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Is Holding Home Depot Stock a Wise Call After Fed Trims Interest Rate?

The Home Depot Inc. HD has seen its stock waver due to rising interest rates, which led to a slowdown in the housing market. The housing sector has struggled with sluggish home sales, high home prices and elevated mortgage rates, all of which have impacted the HD stock’s performance. In the past six months, the Home Depot stock has declined 1.2%, reflecting its dependence on the housing market.

However, on Sept. 18, 2024, the U.S. Federal Reserve announced its first rate cut in four years, reducing interest rates by 50 basis points. This shift from the Fed’s previous tightening policy signals optimism for economic growth, inflation control, improved job market and global stability.

The Fed’s recent decision to cut interest rates has the potential to be a game-changer for home improvement companies like Home Depot and Lowe’s Companies Inc. LOW. Tecnoglass TGLS and Builders FirstSource BLDR are other home-building retail stocks expected to gain from the rate cut.

Since the Fed’s announcement, shares of Home Depot have risen 1.8%, returning to a positive trajectory after remaining volatile in recent months.

What Fed’s Rate Cut Holds for Home Depot Stock?

The Fed’s recent interest rate cut is seen as a potential turning point for sectors tied to consumer spending and housing, wherein Home Depot plays a significant role.

The central bank’s lowering of borrowing costs is expected to make mortgages and home improvement loans more affordable, driving the demand for renovation services and new home purchases. Analysts also expect a rise in housing demand, anticipating lower home loan rates. This uptick in housing activity is expected to trickle down to home improvement retailers like Home Depot, with increased sales of building materials, tools and home renovation products.

The rate cut is also anticipated to boost consumer confidence, a critical factor for Home Depot. With borrowing costs reduced, homeowners are more likely to invest in larger home improvement projects, knowing that they can finance the projects at lower rates. This renewed confidence can lead to higher spending on everything from kitchen remodels to backyard upgrades, translating into an improved bottom line for Home Depot.

Analysts are already predicting that the rate cut will lead to a spike in demand for home improvement services and products. The affordability of loans, with a possible resurgence in housing activity, creates a favorable environment for Home Depot’s growth. The company, which has a strong market presence and extensive product offerings, is well-positioned to capitalize on this increased demand.

Home Depot’s Strategic Advantage

As the largest home improvement retailer in the United States, Home Depot is well-positioned to benefit from the Fed’s rate cut. The company’s vast network of stores, expansive product lineup and growing online presence portray its scale and reach to meet rising consumer demand. Home Depot’s focus on customer service, DIY support and professional (Pro) contractor services makes it a go-to destination for both homeowners and industry professionals looking to take advantage of lower interest rates.

The Fed’s rate cut also coincides with Home Depot’s ongoing investments in technology, digital and supply-chain efficiency through its “One Home Depot” plan. These initiatives are expected to improve customer experience and enhance the company’s ability to meet increased demand as the housing market recovers. HD’s readiness, well-curated product assortments and high associate engagement are expected to continue driving market share growth. Its continued expansion into online sales and home delivery services is expected to strengthen its position in the post-rate-cut landscape.

While the immediate effects of the Fed’s rate cut are sparse, the long-term outlook for Home Depot remains positive. The combination of lower interest rates, improved housing market conditions and increased consumer spending on home improvements creates a strong growth trajectory for the company. If mortgage rates continue to decline in the coming months, Home Depot could experience sustained growth in revenues and profitability.

The rate cut is also expected to spur additional investments in housing-related sectors, including home construction, which should benefit Home Depot’s business. As the economy stabilizes and inflationary pressures ease, the overall market for home improvement products and services is expected to expand, offering continued growth opportunities for the company. The addition of SRS Distribution to HD’s portfolio has strengthened its position in the building materials distribution sector, and enhanced its ability to provide service to professional contractors and tradespeople.

Home Depot’s Ongoing Hardships Keep Outlook Bleak

While the recent rate cut presents an opportunity for growth in the long term, Home Depot’s near-term challenges related to the softened demand for certain big-ticket, discretionary categories remain concerning. This ongoing softness has negatively impacted sales, comparable sales (comps) and bottom-line performances. As a result of these challenges, Home Depot’s outlook for fiscal 2024 remains cautious.

HD projects a year-over-year comps decline of 3-4% for the 52 weeks of fiscal 2024. It expects the 3% decline in comps to reflect the ongoing adverse consumer demand environment witnessed in the first half of fiscal 2024. While HD does not anticipate a decline at the lower end of the range, a 4% drop would indicate increased pressure on consumer demand.

The company anticipates sales to increase 2.5-3.5% year over year for fiscal 2024, including $2.3 billion of sales contribution from the 53rd week and $6.4 billion incremental sales from SRS. HD estimates GAAP earnings per share to decline 2-4% year over year for fiscal 2024. It expects adjusted earnings per share to dip 1-3%. The company anticipates the 53rd week to contribute 30 cents per share to earnings in fiscal 2024.

HD’s Estimates Indicate a Downtrend

The Zacks Consensus Estimate for Home Depot’s fiscal 2024 and 2025 EPS declined 0.1% and 0.3%, respectively, in the last 30 days. The downward revision in earnings estimates indicates a bearish outlook on the stock.

The Zacks Consensus Estimate for Home Depot’s third-quarter fiscal 2024 EPS declined 0.5% in the last 30 days, highlighting the growing concerns about the challenges that the company is expected to encounter in the near term.

 

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Home Depot’s Premium Valuation

With the stock steadily ticking up, the company is trading at a forward 12-month P/E multiple of 25.36X, exceeding the industry average of 22.61X and the S&P 500’s average of 21.84X. At current levels, Home Depot’s stock valuation looks expensive.

 

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The premium valuation indicates that investors have high expectations for Home Depot’s future performance and growth potential. Investors may be skeptical about buying the stock at these premium levels and may wait for a better entry point.

What Should Investors Do Now?

The U.S. Federal Reserve’s rate cut is a welcome development for Home Depot and the broader home improvement industry. With reduced borrowing costs and the potential for increased housing market activity, Home Depot is well-positioned to capitalize on rising consumer demand. As homeowners and contractors take advantage of more affordable loans, HD stands to see a significant boost in sales, revenues and market share, making the rate cut a potential boon for the company.

Given HD’s premium valuation, investors should examine the developments to identify an optimal entry point, as rushing in could affect portfolio gains. If you already own the Zacks Rank #3 (Hold) stock, maintaining your position can be beneficial, given the long-term growth prospects.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Lowe’s Companies, Inc. (LOW) : Free Stock Analysis Report

The Home Depot, Inc. (HD) : Free Stock Analysis Report

Builders FirstSource, Inc. (BLDR) : Free Stock Analysis Report

Tecnoglass Inc. (TGLS) : Free Stock Analysis Report

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