Source: PaxForex Premium Analytics Portal, Fundamental Insight
The S&P 500 has increased slightly at the start of 2023 but remains significantly lower than its peak over a year ago, and many high-quality stocks are in a similar situation, attempting to recover from the gains made over the past couple of years. One such enterprise is Home Depot, a large home-improvement retailer that witnessed an increase in revenue in fiscal 2020 and fiscal 2021 but is now experiencing a substantial slowdown that investors need to consider.
The Home Depot shares are down nearly 30% from their peak in December 2021, which raises the question of whether this is a good time to buy the stock. After achieving revenue growth of 19.9% and 14.4% in fiscal 2020 and 2021, respectively, Home Depot's sales growth decreased to 4.1% in fiscal 2022. This deceleration intensified in the fourth quarter of 2022, with revenue increasing only 0.3% year over year to $35.8 billion, the first time since November 2019 that Home Depot failed to meet Wall Street expectations for its top line.
Home Depot's same-store sales declined by 0.3% in the quarter, and diluted earnings per share increased by 2.8%. Although rising mortgage rates in the US caused the housing market to cool off, investors did not worry that this would have a significant adverse effect on Home Depot since people might focus on fixing up their existing homes instead of buying a new one. However, with an uncertain economy, the outlook is not as optimistic.
Management predicts that revenue and same-store sales growth will be stagnant in fiscal 2023, blaming softer customer demand and a shift in spending from goods to services and travel. Home Depot's plan to invest $1 billion in raising employee wages and benefits and boosting their training will also put pressure on margins in the upcoming fiscal year. As a result, the operating margin is anticipated to be 14.5% for fiscal 2023, down from 15.3% in the previous fiscal year, and diluted EPS is expected to decline by mid-single digits.
However, Home Depot increased its quarterly dividend by 10%, which is welcome news for investors who prioritize dividends. Home Depot's stock is down approximately 6% in 2023 and trades at a price-to-earnings (P/E) ratio of under 18, a discount to both the S&P 500 valuation and Home Depot's five-year average P/E ratio of over 22.
In comparison to its smaller rival, Lowe's, Home Depot is the superior company, generating more sales from high-value professional customers, and generally posting better margins. Home Depot's return on invested capital (ROIC) in the latest quarter was a remarkable 44.6%, compared to Lowe's 27.6%. Additionally, Home Depot's top-line growth has been higher over the past five years.
Therefore, despite the challenges that Home Depot faces, its impressive attributes as a company suggest that its attractive P/E may be unjustified. Investors who can look beyond the near-term struggles may want to consider taking a closer look at the stock.
As long as the price is above 290.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 293.21
- Take Profit 1: 302.00
- Take Profit 2: 310.00
Alternative scenario:
If the level of 290.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 290.00
- Take Profit 1: 285.00
- Take Profit 2: 277.00
