Source: PaxForex Premium Analytics Portal, Fundamental Insight
Home Depot was undoubtedly one of the big winners of the coronavirus pandemic era, as people who spent more time at home quickly switched to renovation projects. But with the threat of a potential recession, shareholders are considering changes to their portfolios to better prepare themselves for what might come.
If you're hesitant about what to do with Home Depot stock (if you have it, of course), keep reading to find more clarity in the arguments for and against it.
One of the most attractive features of investing in Home Depot is its generous return policy. Since the beginning of fiscal 2020, the company has paid $19.4 billion in dividends and repurchased $20.7 billion in stock, representing 12% of its current market value of $336 billion. Only companies that produce huge amounts of free cash flow can even come close to this kind of corporate action.
Shareholders receive additional financial benefits. Dividends provide a steady stream of income for investors who prefer such things. And share repurchases increase earnings per share, helping long-term owners with a potentially higher stock price over time.
Bulls can also point to Home Depot's dominance in the Pro segment. These customers include professional professionals such as general contractors, plumbers, electricians, etc., who rely on Home Depot as critical partners for their small businesses.
It is estimated that Home Depot gets about half of its total revenue from professionals, far more than Lowe's 25% share of the revenue. That means that in the last fiscal quarter, $19.5 billion of Home Depot's sales came from professionals, compared to $5.9 billion of Lowe's sales. That's a very big difference.
This favorable situation benefits Home Depot in three different ways. First, it leads to improved financial performance. Home Depot has consistently shown higher operating margins and return on invested capital than its smaller competitor. In addition, these professionals can be much more loyal customers than do-it-yourselfers. Do-it-yourself customers may look for the lowest price in stores, while a professional will work with a retailer with whom it has a long-standing relationship, taking advantage of financing opportunities and exclusive offers.
Finally, and probably most relevant at this time, increasing the number of professional customers supports Home Depot in an economic downturn. Professionals are being hired for larger, more complex renovation projects, usually by higher-income families who are less affected by the recession.
The Home Depot business is doing well right now. Management expects same-store sales to grow 3 percent in the fiscal year 2023 (ending Jan. 29), up from 11.4 percent the previous year. That's not too bad when you consider the company's growth in recent years and the current macroeconomic picture.
But what if the U.S. goes into a full-blown recession later this year? JPMorgan Chase CEO Jamie Dimon predicts that a combination of high interest rates and inflation will push the economy into recession in 2023. The implications for the housing market need to be thought through. A severe and prolonged recession would certainly hurt Home Depot's prospects, at least temporarily.
As we mentioned earlier, Home Depot's professional business is a good safety cushion. But it does not make the company completely secure. During the Great Recession, Home Depot's annual revenue fell 7.8% and 7.2% in fiscal years 2008 and 2009, respectively, as a result of the subprime mortgage crisis. That's not to say the situation is as dire now, but you should think about it.
In addition, you need to think about changing your consumer spending patterns. With spare cash and limited funds, households during the pandemic focused on improving their housing conditions. This behavior may now be a thing of the past.
Leisure and entertainment may resume their activity, especially travel. Passenger travel in the U.S. seems to have returned to pre-pandemic levels. And according to Deloitte, a consulting firm, consumer spending on discretionary shopping in October (the latest data available) grew faster than any other category.
Home Depot's revenue growth in fiscal years 2020 and 2021, which we saw in the mid-to mid-twenties, could prove to be a huge force driving demand growth, meaning slower growth in future years that will be below historical norms.
As long as the price is above 315.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 331.70
- Take Profit 1: 339.00
- Take Profit 2: 347.00
Alternative scenario:
If the level of 315.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 315.00
- Take Profit 1: 309.00
- Take Profit 2: 302.00
