Source: PaxForex Premium Analytics Portal, Fundamental Insight
Cyclical downturns are an inherent part of the competitive landscape in the home improvement industry. When economic growth slows, interest rates rise, or inflation increases, consumers typically cut back on their spending. Conversely, they tend to allocate more of their funds to discretionary home purchases when they feel more optimistic about their personal finances.
These economic challenges are currently putting pressure on the sales of Home Depot and its competitors. However, Home Depot has a history of successfully navigating through various cyclical slumps while maintaining its leadership in the industry. It has consistently emerged from these downturns to establish new records in annual sales and earnings. Considering this broader perspective, let's take a step back and examine Home Depot's prospects for the next few years.
All indications available to investors suggest that Home Depot is poised to face a challenging period, at least until the conclusion of 2023. In mid-August, the management reiterated their forecast, anticipating a sales decline ranging between 2% and 5% for the current year, essentially offsetting the 4% growth seen in 2022. These difficulties stem from the same pressures affecting other retailers across the industry spectrum, including giants like Target and Best Buy, as consumers shift their spending from non-essential purchases to essential ones.
Nevertheless, Home Depot has found pockets of resilience amid this demanding selling environment. Consumers are still eager to invest in smaller home improvement projects, even as they cut back on larger expenditures like appliances. Furthermore, customer traffic trends are showing signs of stabilization, with a 2% decline in the last quarter representing a notable improvement compared to the preceding quarter's 5% slump.
Despite challenges such as declining sales and deflation in lumber prices, profitability has remained relatively robust. CEO Ted Decker expressed satisfaction with the second-quarter performance when addressing investors on August 15.
There are compelling reasons to maintain optimism about Home Depot's prospects over the next several years, transcending the possibility of a short-term industry downturn. Several structural trends bode well for the home improvement market, including aging housing stock, favorable demographics with more millennials entering the housing market, and the continued trend of remote work, which is creating new opportunities for home development.
Rival Lowe's also emphasized these tailwinds in a recent analyst conference call, with CEO Marvin Ellison expressing bullish sentiment in late August. As the market leader, Home Depot is well-positioned to capture a significant share of this expanding market. Executives echoed this sentiment in August, remaining positive about the medium- to long-term outlook for the home improvement industry and their ability to gain market share in a sizable yet fragmented market.
As of today, Home Depot's stock valuation stands at approximately 2 times annual sales. During the peak of the pandemic, the valuation reached 3 times revenue, while recent lows were around 1.8 times sales. In comparison, Lowe's, which lags behind Home Depot in metrics like profit margin and market share, boasts a more affordable valuation of 1.5 times sales. Home Depot also carries a slightly higher price-to-earnings ratio, with a valuation of 23 times earnings, compared to Lowe's 20 P/E ratio.
Nonetheless, it appears highly likely that Home Depot will establish new records in terms of profits and earnings in the coming years. There is even a possibility that this rebound could commence as early as 2024, given the potential for only a minor sales shortfall this year.
In any case, shareholders can reasonably anticipate strong returns from this retailer, as Home Depot captures a larger share of the market and continues to reward investors through share buybacks and dividends. Those who weather this turbulent period are likely to reap the benefits of the inevitable resurgence in the home improvement market over the next several years.
As long as the price is above 321.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 325.86
- Take Profit 1: 333.00
- Take Profit 2: 341.50
Alternative scenario:
If the level of 321.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 321.00
- Take Profit 1: 314.00
- Take Profit 2: 310.00
