Can Home Depot Stock Return To Pre-Inflation Shock Highs?

Home Depot stock (NYSE: HD), the world’s largest home improvement retailer, currently trades at $318 per share, around 24% below its level of $416 seen on December 7, 2021 (pre-inflation shock high), and has the potential for sizable gains. HD saw its stock trading at around $267 at the end of September 2022, when the Fed kept increasing rates, and now remains 19% above that level. In comparison, the S&P 500 gained about 21% during this period. The company’s stock benefited from the growth in the housing market after having seen some softness at the beginning of the year. The Federal Reserve has aggressively raised interest rates since 2022 to fight inflation. Consequently, this has translated to higher mortgage rates, suppressing home sales last year. But even with interest rates still high (6.81% in July’s first week compared to 6.4% in March 2023 and only 4.5% in April 2022 last year), home prices are now gaining again. Home prices grew 0.1% year-over-year (y-o-y) in May 2023. It is worth mentioning that HD, with more than 2300 locations, generates more sales from professional contractors than its rival Lowe’s does, and that diversity is a big win for the company.

Returning to the pre-inflation shock level means that Home Depot will have to gain about 31% from here. While it has the potential to recover to those levels, we estimate Home Depot’s Valuation to be around $317 per share, almost in line with the current market price. Our detailed analysis of Home Depot’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses

In contrast, here’s how HD stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

HD and S&P 500 Performance During 2007-08 Crisis

HD stock declined from nearly $33 in October 2007 (pre-crisis peak) to around $21 in March 2009 (as the markets bottomed out), implying that HD stock lost almost 37% of its pre-crisis value. It recovered post the 2008 crisis to levels of about $29 in early 2010, rising roughly 39% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

HD Fundamentals Over Recent Years

HD revenues increased from around $110.2 billion in 2019 to about $132.1 billion in 2020, due to the impact of the Covid-19 lockdown. The company benefited from millions of homeowners spending substantially more time in their homes during that period. In fact, there was an increase in remote working, which allowed the company to serve those customers looking to build and maintain a home office beyond the pandemic as well. The sales continued to rise albeit at a slower rate as the economy recovered from the impact of the pandemic. Consequently, HD’s revenue reached $157.4 billion in 2022. Earnings per share grew from around $10.29 in 2019 to $16.74 in 2022. The retailer’s accelerating promotions to help resolve a mishandled inventory situation from earlier in FY 2022, and higher spending on fuel, freight, transportation, and increased compensation in distribution centers weighed heavily on the company’s profitability in 2022.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Home Depot stock has the potential for strong gains once fears of a potential recession are allayed.

What if you’re looking for a portfolio that aims for long-term growth? Here’s a value portfolio that’s done much better than the market since 2016.

[1] Month-to-date and year-to-date as of 7/13/2023
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market Beating Portfolios
See all Trefis Price Estimates