Source: PaxForex Premium Analytics Portal, Fundamental Insight
Home Depot stock is now worth much less than it was at the beginning of 2022: the stock is down more than 25%, compared to the S&P 500's 14% decline over the same time period. The list of investor concerns about the company's stock has expanded to include weak customer trends and a potential recession.
However, these are short-term concerns, and Home Depot has experienced many such downturns in the past. Given this experience, let's try to figure out if this home improvement retailer's stock is a good buy today.
In the fiscal year 2022, Home Depot was able to capitalize on a difficult situation. After several years of rapid growth, demand for home goods has shifted sideways, while at the same time, spending has increased. Nonetheless, comparable-store sales were up 3% last year, in addition to 11% growth in 2021.
The business, however, showed signs of crisis. For the year ending in late January, customer traffic to stores fell 5%, offset only by a 9% increase in average spending. Home Depot has shown pricing power in the face of tough demand. It was also able to outperform a similar company, Lowe's, due to its greater presence among professional contractors. These factors indicate that the industry leader maintains a premium position, which will be valuable in a possible downturn.
At the same time, Home Depot's financial performance is just as impressive. It is well known on Wall Street that this retailer is unusually efficient, with an operating profit margin of nearly 15% on sales, compared to Lowe's of 11%. Management has also excelled in capital allocation. This is evident in Home Depot's return on invested capital, which regularly exceeds 40%.
The company's share repurchase expenses contribute to this figure. These expenses also boost shareholder returns. For example, in 2022, Home Depot's earnings per share rose 7.4%, even though net income increased only 4.1%.
Investors buying the stock today will have to be patient. Home Depot management predicts that the company's revenues will remain flat this year and that profitability will decline slightly. The continued decline in customer traffic will be difficult to offset, even with strong demand among professional contractors.
Still, nothing in this weak scenario threatens the broader investment thesis. Home Depot is steadily gaining market share in a huge industry in which it already dominates. Shareholder returns are supported by share repurchases as well as dividends, which were up 10% last year after last year's 15% increase. And attractive growth initiatives include expanding its e-commerce platform and offering more do-it-yourself services for professionals and consumers.
Investors may have overpaid for all this potential in early 2022 when Home Depot was valued at 3 times its annual sales. Today, however, it's hard to argue that the company's stock is overvalued, as the P/S ratio is just under 2x earnings.
Of course, Home Depot will likely have a weaker 2023, even if the U.S. economy manages to avoid a recession. But the company should lead the industry out of the next cyclical downturn, as it has in most previous years. Investors who bought the stock will be glad they just kept it in their portfolio until then.
As long as the price is above 285.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 291.86
- Take Profit 1: 299.00
- Take Profit 2: 307.00
Alternative scenario:
If the level of 285.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 285.00
- Take Profit 1: 280.00
- Take Profit 2: 270.00
