Source: PaxForex Premium Analytics Portal, Fundamental Insight
Although the S&P 500 Index is on the upside so far this year, the market's double-digit drop in 2022 has set the stage for investors to realize bargain-basement opportunities. Large companies such as Home Depot are selling at significant discounts, making it a very lucrative proposition for investors. Home Depot stock is still down about 30% from its all-time high of $406 in December 2021.
Does that mean now is a good time to buy stock in this leading retailer? Let's break it down.
Home Depot's business got a boost during the 2020 pandemic. Consumers, who had extra spare cash, embarked on renovations. As a result, this home improvement giant saw double-digit percentage growth in annual revenue in fiscal years 2020 and 2021.
Home Depot hasn't seen double-digit growth since fiscal 2004, which couldn't help but cheer up shareholders. From the beginning of 2020 through the end of 2021, the stock was up 90% compared to the S&P 500's 52% total return. At the time, it was great to own Home Depot stock.
However, the last fiscal year painted a bleaker picture. Difficult year-over-year comparisons and a marked shift in consumer spending away from physical goods and toward services and travel are having a negative impact on the company.
Home Depot's fiscal year 2022 revenue was $157.4 billion, up 4.1 percent from the previous year. Same-store sales showed an increase of 3.1%. Both of these numbers were worse when looking at the last fiscal quarter, indicating a downward trend throughout last year.
Net income was also up 4.1% in fiscal 2022. But thanks to continued share repurchases, Home Depot's diluted earnings per share was up 7.5%. It's certainly nice to see the bottom line growing faster than the top line, especially now that many companies are struggling with inflationary pressures.
Management doesn't expect things to get much better in the current fiscal year. They predict that same-store sales and diluted earnings per share will remain flat in the fiscal year 2023 compared to 2022.
The recent negative circumstances that Home Depot is facing are beyond the company's control, and that should hopefully ease investor concerns. Looking back over the last three years, who could have predicted a global pandemic, supply chain problems, rampant inflation, and now mortgage rates that haven't been this high since the Great Recession?
No one could have known these events would happen. The best thing any business can do is try to successfully deal with all that has befallen it to ensure its future success.
Based on revenues for the fiscal year 2022, which is a gigantic amount by any standards, the company currently holds just 17.5 percent of the $900 billion market, according to management. As the clear leader in its industry (Home Depot's fiscal 2022 sales will be $60 billion, more than rival Lowe's), the business is well positioned to continue growing revenue and profits over the next decade as the economy improves.
Given these market opportunities, it is easy to conclude that Home Depot is in a strong competitive position. The company operates 2,322 stores, of which 2,007 are in the United States, which provides ample access and convenience for customers to get the products and advice they need to complete projects.
Moreover, because Home Depot is a successful business that has existed for more than four decades, there is little risk of industry disruption. Skeptics may point to the emergence of e-commerce as a threat, but because Home Depot typically sells large and bulky products, the company is secure.
What's more, in the last fiscal quarter, 45 percent of online orders were received at one Home Depot store. Clearly, the company has developed an omni-channel shopping experience that is gaining momentum.
Home Depot's longevity is certainly a favorable characteristic that points to greater success when macroeconomic conditions improve. It is a profitable business that generates a lot of free cash flow. And investors can buy the stock today at an attractive price-to-earnings ratio of less than 18, below the 10-year average valuation.
While the price is below 300.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 286.41
- Take Profit 1: 277.00
- Take Profit 2: 267.00
Alternative scenario:
If the level 300.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 300.00
- Take Profit 1: 308.00
- Take Profit 2: 316.00
