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Home Depot (HD) Rises 7.3% Post Q2 Earnings: Buy, Hold, or Sell?
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The Home Depot Inc. (HD - Free Report) has risen 7.3% since reporting second-quarter fiscal 2024 results on Aug 13, 2024. This reflects an outperformance compared with its industry peers and the broader S&P 500 index. Although the stock showed modest growth since its earnings release, HD’s second-quarter fiscal 2024 results spurred mixed sentiments among investors.
Home Depot’s second-quarter fiscal 2024 results were mixed. The company exceeded the Zacks Consensus Estimate for earnings per share (EPS) and revenues. However, EPS declined year over year. In the quarter, Home Depot continued facing challenges related to higher interest rates and increased macroeconomic uncertainty, which further pressured consumer demand for home improvement projects.
However, the company finally showed a top-line recovery in second-quarter fiscal 2024, combating the continued pressures on consumer demand for certain big-ticket, discretionary categories, resulting in weaker spending across home improvement projects. This has been a major drag on Home Depot’s revenues in recent quarters.
Notably, HD posted modest revenue growth of just 0.6% in second-quarter fiscal 2024, an improvement from the 2% revenue decline recorded in second-quarter fiscal 2023 and the 2.3% decline reported in the first quarter of fiscal 2024. The slight sales recovery in the second quarter of fiscal 2024 was primarily driven by contributions from the recently acquired SRS Distribution Inc. Home Depot's revenues for the fiscal second quarter included a $1.3-billion contribution from SRS, reflecting about six weeks of sales during the quarter.
Core Hardships Affecting HD
Home Depot, a distinguished name in the home improvement industry, has been witnessing widespread pressures across its business primarily due to softened demand. The company has consistently faced weakness in certain big-ticket, discretionary categories. This ongoing softness has negatively impacted both sales and comparable sales (comps) performances.
As a result of these continued demand challenges, Home Depot has issued a cautious outlook for fiscal 2024 comps, projecting a decline of 3-4% year over year for the 52 weeks of fiscal 2024. The company 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.
Home Depot's heavy reliance on the housing market, which has recently shown signs of weakness, is another concern. Current trends indicate sluggish home sales, elevated prices and high mortgage rates, contributing to HD’s volatile stock price. Furthermore, inflationary pressures, especially lumber prices, have affected its financial performance in recent quarters.
HD’s Estimates Suggest Shifting Dynamics
The Zacks Consensus Estimate for Home Depot’s fiscal 2024 and 2025 EPS declined 2% and 3.7%, respectively, in the last 30 days. The downward revision in earnings estimates indicates that analysts are slowly losing confidence in the stock.
The Zacks Consensus Estimate for Home Depot’s third-quarter fiscal 2024 EPS declined 5.5% in the last 30 days, highlighting the growing concerns about the challenges that the company is expected to encounter in the near term.
Image Source: Zacks Investment Research
For fiscal 2024, the Zacks Consensus Estimate for HD’s sales implies 3.2% year-over-year growth, with a 0.7% decline in EPS. The consensus mark for fiscal 2025 sales and earnings indicates 3.4% and 4.1% year-over-year growth, respectively.
Is HD’s Overall Share Performance Just as Impressive?
Home Depot shares have experienced volatility over the past year. A closer look at the stock’s one-year performance reveals that it has underperformed the industry in this period. Specifically, Home Depot's stock has risen 15.2% in the past year compared with the industry’s growth of 15.6% and the S&P 500’s 27% rally.
Additionally, the HD stock has underperformed peers like Tecnoglass (TGLS - Free Report) and Builders FirstSource’s (BLDR - Free Report) gains of 74.5% and 37.1%, respectively, in the past year. However, Home Depot shares have outpaced its main competitor, Lowe’s Companies Inc.’s (LOW - Free Report) 12.2% increase in this period.
Currently, the HD stock is trading at a 5.7% discount from its 52-week high of $396.87 reached on Mar 21, 2024, suggesting potential for upside.
Image Source: Zacks Investment Research
Can Strategies Fuel Home Depot's Growth?
HD is confident about its initiatives to strengthen the business. The company has been actively investing in creating a seamless, interconnected experience for customers, enhancing the pro wallet through its unique ecosystem of capabilities and expanding its store footprint. It is also optimistic about the future of the home improvement industry and its ability to expand market share in this space.
Home Depot is progressing well with its "One Home Depot" investment plan, which focuses on expanding supply-chain facilities, investing in technology and enhancing the digital experience. The interconnected retail strategy and robust technology infrastructure have consistently increased web traffic over the past few quarters. Improved search capabilities, an enhanced Pro site experience and strong fulfillment capabilities have driven online conversions.
At the store level, Home Depot's readiness, well-curated product assortments and high associate engagement have been vital in driving market share growth, even amid recent demand softness. Additionally, HD benefits from its strong position in a duopoly, with Lowe's being its primary competitor in the home improvement retail industry.
Delivering an exceptional shopping experience for every purchase occasion is critical for Home Depot's success. A significant growth opportunity lies in increasing its share of wallet with Pro customers and excelling in serving those working on complex projects. To this end, the company has made substantial investments in its Pro sales teams and capabilities.
Home Depot’s Premium Valuation
With the stock steadily ticking up, the company is currently trading at a forward 12-month P/E multiple of 24.47X, exceeding the industry average of 22.09X and the S&P 500’s average of 21.72X. At current levels, Home Depot’s stock valuation looks expensive.
Image Source: Zacks Investment Research
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.
Moreover, Home Depot’s stock is trading above its 50-day and 200-day moving averages, signaling strong upward momentum and price stability. This technical strength indicates positive market sentiment and confidence in Home Depot's financial health and prospects.
HD Stock Trades Above 50 and 200-Day Moving Average
Image Source: Zacks Investment Research
Is it Prudent to Buy the HD Stock?
Home Depot's strong market position, strategic initiatives like the "One Home Depot" plan and robust growth among Pro customers present a promising outlook. However, potential challenges such as rising interest rates, high lumber prices and broader economic pressures in the home improvement industry should be carefully considered.
While Home Depot demonstrates long-term potential, investors should avoid making hasty decisions. Given HD’s premium valuation, it is ideal to 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.
Image: Bigstock
Home Depot (HD) Rises 7.3% Post Q2 Earnings: Buy, Hold, or Sell?
The Home Depot Inc. (HD - Free Report) has risen 7.3% since reporting second-quarter fiscal 2024 results on Aug 13, 2024. This reflects an outperformance compared with its industry peers and the broader S&P 500 index. Although the stock showed modest growth since its earnings release, HD’s second-quarter fiscal 2024 results spurred mixed sentiments among investors.
Home Depot’s second-quarter fiscal 2024 results were mixed. The company exceeded the Zacks Consensus Estimate for earnings per share (EPS) and revenues. However, EPS declined year over year. In the quarter, Home Depot continued facing challenges related to higher interest rates and increased macroeconomic uncertainty, which further pressured consumer demand for home improvement projects.
However, the company finally showed a top-line recovery in second-quarter fiscal 2024, combating the continued pressures on consumer demand for certain big-ticket, discretionary categories, resulting in weaker spending across home improvement projects. This has been a major drag on Home Depot’s revenues in recent quarters.
Notably, HD posted modest revenue growth of just 0.6% in second-quarter fiscal 2024, an improvement from the 2% revenue decline recorded in second-quarter fiscal 2023 and the 2.3% decline reported in the first quarter of fiscal 2024. The slight sales recovery in the second quarter of fiscal 2024 was primarily driven by contributions from the recently acquired SRS Distribution Inc. Home Depot's revenues for the fiscal second quarter included a $1.3-billion contribution from SRS, reflecting about six weeks of sales during the quarter.
Core Hardships Affecting HD
Home Depot, a distinguished name in the home improvement industry, has been witnessing widespread pressures across its business primarily due to softened demand. The company has consistently faced weakness in certain big-ticket, discretionary categories. This ongoing softness has negatively impacted both sales and comparable sales (comps) performances.
As a result of these continued demand challenges, Home Depot has issued a cautious outlook for fiscal 2024 comps, projecting a decline of 3-4% year over year for the 52 weeks of fiscal 2024. The company 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.
Home Depot's heavy reliance on the housing market, which has recently shown signs of weakness, is another concern. Current trends indicate sluggish home sales, elevated prices and high mortgage rates, contributing to HD’s volatile stock price. Furthermore, inflationary pressures, especially lumber prices, have affected its financial performance in recent quarters.
HD’s Estimates Suggest Shifting Dynamics
The Zacks Consensus Estimate for Home Depot’s fiscal 2024 and 2025 EPS declined 2% and 3.7%, respectively, in the last 30 days. The downward revision in earnings estimates indicates that analysts are slowly losing confidence in the stock.
The Zacks Consensus Estimate for Home Depot’s third-quarter fiscal 2024 EPS declined 5.5% in the last 30 days, highlighting the growing concerns about the challenges that the company is expected to encounter in the near term.
Image Source: Zacks Investment Research
For fiscal 2024, the Zacks Consensus Estimate for HD’s sales implies 3.2% year-over-year growth, with a 0.7% decline in EPS. The consensus mark for fiscal 2025 sales and earnings indicates 3.4% and 4.1% year-over-year growth, respectively.
Is HD’s Overall Share Performance Just as Impressive?
Home Depot shares have experienced volatility over the past year. A closer look at the stock’s one-year performance reveals that it has underperformed the industry in this period. Specifically, Home Depot's stock has risen 15.2% in the past year compared with the industry’s growth of 15.6% and the S&P 500’s 27% rally.
Additionally, the HD stock has underperformed peers like Tecnoglass (TGLS - Free Report) and Builders FirstSource’s (BLDR - Free Report) gains of 74.5% and 37.1%, respectively, in the past year. However, Home Depot shares have outpaced its main competitor, Lowe’s Companies Inc.’s (LOW - Free Report) 12.2% increase in this period.
Currently, the HD stock is trading at a 5.7% discount from its 52-week high of $396.87 reached on Mar 21, 2024, suggesting potential for upside.
Image Source: Zacks Investment Research
Can Strategies Fuel Home Depot's Growth?
HD is confident about its initiatives to strengthen the business. The company has been actively investing in creating a seamless, interconnected experience for customers, enhancing the pro wallet through its unique ecosystem of capabilities and expanding its store footprint. It is also optimistic about the future of the home improvement industry and its ability to expand market share in this space.
Home Depot is progressing well with its "One Home Depot" investment plan, which focuses on expanding supply-chain facilities, investing in technology and enhancing the digital experience. The interconnected retail strategy and robust technology infrastructure have consistently increased web traffic over the past few quarters. Improved search capabilities, an enhanced Pro site experience and strong fulfillment capabilities have driven online conversions.
At the store level, Home Depot's readiness, well-curated product assortments and high associate engagement have been vital in driving market share growth, even amid recent demand softness. Additionally, HD benefits from its strong position in a duopoly, with Lowe's being its primary competitor in the home improvement retail industry.
Delivering an exceptional shopping experience for every purchase occasion is critical for Home Depot's success. A significant growth opportunity lies in increasing its share of wallet with Pro customers and excelling in serving those working on complex projects. To this end, the company has made substantial investments in its Pro sales teams and capabilities.
Home Depot’s Premium Valuation
With the stock steadily ticking up, the company is currently trading at a forward 12-month P/E multiple of 24.47X, exceeding the industry average of 22.09X and the S&P 500’s average of 21.72X. At current levels, Home Depot’s stock valuation looks expensive.
Image Source: Zacks Investment Research
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.
Moreover, Home Depot’s stock is trading above its 50-day and 200-day moving averages, signaling strong upward momentum and price stability. This technical strength indicates positive market sentiment and confidence in Home Depot's financial health and prospects.
HD Stock Trades Above 50 and 200-Day Moving Average
Image Source: Zacks Investment Research
Is it Prudent to Buy the HD Stock?
Home Depot's strong market position, strategic initiatives like the "One Home Depot" plan and robust growth among Pro customers present a promising outlook. However, potential challenges such as rising interest rates, high lumber prices and broader economic pressures in the home improvement industry should be carefully considered.
While Home Depot demonstrates long-term potential, investors should avoid making hasty decisions. Given HD’s premium valuation, it is ideal to 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.