What’s Next For Home Depot Stock After An Upbeat Q3?

Note: Home Depot FY’23 ended on January 28, 2024.

Home Depot stock (NYSE: HD), the world’s largest home improvement retailer, fell marginally 1.3% on Tuesday, 12th November (to $403), as compared to a 0.3% decline in the S&P 500 index. In comparison, HD’s peer Lowe’s (NYSE: LOW) saw its stock down 1.7% to around $270 on the same day. Home Depot reported that the company beat revenue growth for Q3 thanks, in part, to hurricane activity and increased demand from areas impacted by hurricanes, but it experienced a decline in net earnings. The company’s net sales grew 7% year-over-year (y-o-y) to $40.2 billion while adjusted EPS of $3.78 fell 4.3% y-o-y but still managed to beat estimates. 

Rising interest rates and economic unpredictability have led to consumer caution, resulting in a 1.3% decline in comparable sales for the third quarter. This shift in consumer behavior has negatively impacted foot traffic and average transaction values, which decreased slightly to $88.65 in Q3 2024, indicating budget constraints among customers. It should be noted that the company’s operating margin fell 800 basis points y-o-y to 13.5%, due to increased supply chain investments to facilitate its online orders.

The Federal Reserve continued to raise interest rates aggressively since 2022 to fight inflation (until September 2024 when it announced its rate cuts). Consequently, this has translated to higher mortgage rates, which in turn suppressed home sales. After hitting a 2022 high mortgage rate of 7.08% in November, rates started trending down. Currently, the 30-year fixed-rate mortgage averaged 6.79% as of 11th November, up from 6.08% the year before. 

The dropping home prices could be a drag for Home Depot 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 home project spending. Also, it is fair to assume homeowners will continue spending to maintain their properties. The lowering of interest rates could provide some relief to weary home buyers tired of higher mortgage rates. Furthermore, lower rates will encourage homebuilders to build more as they will reduce borrowing costs and make it easier for consumers to utilize home equity lines of credit.

The increase in HD stock over the last 3-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 60% in 2021, -22% in 2022, and 13% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period.

Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could HD face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

Home Depot’s management has provided guidance for the fiscal year, predicting a 2.5% decline in comparable sales for FY 2024. Nevertheless, the company expects total revenue to increase by 4%, fueled by acquisitions and infrastructure enhancements. Margin pressures are anticipated to result in a 2% year-end decline in EPS.

We have revised HD’s Valuation to $404 per share, based on a $14.84 expected EPS and a 27.2x P/E multiple for the fiscal year 2024 – almost inline with the current market price. We forecast HD’s Revenues to be $157.4 billion for the fiscal year 2024, up 3% y-o-y.

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.

[1] Returns as of 11/13/2024
[2] Cumulative total returns since the end of 2016