Why Has Home Depot’s Stock Fallen 10% Since The Beginning Of The Year?

Note: Home Depot FY’22 ended on January 29, 2023.

After a 10% decline year-to-date (YTD), at the current price of around $285 per share, we believe Home Depot stock (NYSE: HD), the world’s largest home improvement retailer, could rise modestly in the long term. HD stock has fallen from around $316 to $285 YTD, underperforming the broader indices, with the S&P growing about 6% over the same period. The company’s stock is down as it has been facing some challenges recently, most notably the softness in the housing market and rising inflation. The Federal Reserve has continued to raise interest rates aggressively since 2022 to fight inflation. Consequently, this has translated to higher mortgage rates, which in turn suppressed home sales. After hitting a 2022 high of 7.08% in November, rates started trending down in 2023. The 30-year fixed-rate mortgage averaged 6.32% in the week ending March 30, down from 6.42% the week before. But still, this value is higher than the 30-year fixed-rate of 4.67% a year ago.

It looks like investors are anticipating that homeowners could be less inclined to undertake expensive renovations when their most valuable asset does not appreciate as they would like. The dropping home prices could be a drag for HD on a short-term basis, but the company’s stock could see a higher upside in the longer term. It should be noted that the company with more than 2300 locations generates more sales from professional contractors than its rival Lowe’s does, and that diversity is helpful at a time when many consumers are pulling back on a home project spending. Also, it is fair to assume homeowners will continue spending to maintain their properties.

Home Depot’s fourth-quarter revenue grew only 0.3% year-over-year (y-o-y) to about $35.8 billion. This was below the consensus analyst estimate by $170 million. However, its earnings per share rose 3% y-o-y to $3.30. This compares to an average analyst forecast of $3.21. Due to declining home prices and slowing home sales, comparable-store sales fell 0.3% to mark a slowdown from the prior quarter’s 4% boost.

Management expects sales growth and comparable sales growth to be approximately flat in fiscal 2023 compared to fiscal 2022. It also expects an operating margin rate of approximately 14.5%, which reflects approximately $1 billion in additional annual compensation for frontline and hourly associates. To add to this, the company also expects diluted earnings-per-share-percent-decline to be in the mid-single digits.

We have revised HD’s Valuation to $303 per share, based on a $15.86 expected EPS and a 19.1x P/E multiple for the fiscal year 2023 – almost 8% higher than the current market price. We forecast HD’s Revenues to be $156.9 billion for the fiscal year 2023, almost flat y-o-y. In light of rising interest rates and the threat of recession, the market at the moment is uncertain, but any decline in the company’s stock could be used as an opportunity to buy.

It is also helpful to see how its peers stack up. Check out how Home Depot’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

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[1] Month-to-date and year-to-date as of 3/29/2023
[2] Cumulative total returns since the end of 2016