Home Depot’s Stock Up A Robust 65%: What’s Next?

After a 65% rise since the March lows of this year, at the current price of around $250 per share (as of June 18th), we believe Home Depot’s stock (NYSE: HD) has reached its near term potential. The home improvement retailer has seen its stock outperform through the coronavirus crisis, rising by almost 14% year-to-date (compared to a 3% decline in S&P), benefiting from the stay-at-home bump. Home Depot’s stock is already about 40% higher than it was at the end of 2017, a little over 2 years ago. Our dashboard, What Factors Drove 40% Change in Home Depot Stock Between 2017 and Now?, provides the key numbers behind our thinking, and we explain more below.

Some of this growth over the last 2 years is justified by the roughly 9% increase in Home Depot’s revenues from $100.9 billion in 2017 to $110.2 billion in 2019. In addition, earnings growth, on a per share basis, was higher by 40%. This was driven by a 160 bps net margins expansion from 8.6% to 10.2% and a 7% decline in shares outstanding during this period.

Finally, Home Depot’s P/E ratio declined slightly from about 24.5x at the end of 2017 to 24.3x currently. The company’s P/E Multiple is yet to see a meaningful decline from the current 24x levels, which still remain 15% higher than the levels of 21x seen in 2019. We believe that the stock could remain rangebound around the current levels in the near term.

So how has Coronavirus impacted the stock?

Home Depot has remained open as an essential retailer during the pandemic restrictions and has benefited from home improvement projects as well as people stocking up on cleaning supplies and safety-related products. By the look of things, people have focused their time and money on fixing up their houses and spring clean-up. Many of these consumers went online to order the items they needed for their projects, boosting Home Depot’s e-commerce sales by 80% year-over-year (y-o-y) in Q1 (levels typically only seen during the Black Friday sales).

In the recent Q1, Home Depot’s revenues grew by 7.1% to $28.3 billion. It also reported an increase of 6.4% in U.S. comparable-store sales, beating expectation of the 4.4% consensus estimate. But the company had to make several adjustments to keep its employees and customers feel safe in its stores, leading to a decline in its profits, despite increased revenues. The company’s total operating expenses increased by 17%, resulting in a 9% y-o-y decline in its operating income. This was largely driven by a 19% y-o-y jump in selling, general & administrative (SG&A) expenses resulting from the company’s employee benefits expansion as part of its Covid-19 response. Consequently, the retailer’s net profit was down by almost 11% y-o-y in Q1.

While the company’s expenses might likely increase due to safety measures, we believe the recent boost in sales might only be short-lived. This could likely be a result of a rise in unemployment and lower consumer sentiment, and its potential impact on holiday sales. Going by our Home Depot Valuation, with an EPS estimate of $10.20 and P/E multiple of 24.0x in 2020, this translates into a price of $245, which is roughly 2% below the current market price.

While Home Depot’s stock may not have a near term upside, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

Did you know that RH stock has also fared well due to the stay-at-home bump? We discuss more on this here – ‘What Factors Drove More Than 100% Change In RH Stock Between 2018 And Now?

In addition, our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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