Source: PaxForex Premium Analytics Portal, Fundamental Insight
Investor enthusiasm for Home Depot stock is experiencing a resurgence, with the shares of the home improvement giant rallying in recent months despite a contracting industry. The optimism on Wall Street hinges on the anticipation of a potential sales rebound, especially as interest rates are expected to decrease in 2024.
While the exact timing of Home Depot's sales recovery remains uncertain, certain aspects of its momentum heading into the new fiscal year are already known. Let's delve into some key considerations:
Declining Traffic
Investors should temper their expectations for the business in the short term. In mid-November, Home Depot projected that comparable-store sales could decline by up to 4% for the entire fiscal year 2023. Factors contributing to this decline include temporary issues such as lumber price deflation. However, the more significant challenge lies in subdued overall demand, evident in the 3% reduction in customer traffic throughout the first three quarters of 2023.
On a positive note, Home Depot is outperforming industry peers like Lowe's in this critical growth metric. This outperformance is attributed to its market share leadership and stronger engagement with professional contractors. Nevertheless, the stock's performance in the coming year may be limited unless Home Depot demonstrates tangible progress in revitalizing sales and customer traffic growth in 2024.
Robust Financial Position
Home Depot boasts a resilient financial profile amid favorable news regarding its finances. Despite confronting weaker revenue trends, the profit margin remains steadfastly above 14% of sales, solidifying its leadership position within the industry. While earnings are anticipated to dip this year, the retailer continues to generate substantial cash. Operating cash flow surged from $10 billion to $16 billion over the last nine months, even with a slight decrease in net income during the same period.
These factors position Home Depot favorably for a potential dividend increase in early 2024. Notably, the company has set a more ambitious cash return goal compared to Lowe's. Home Depot aims to allocate 55% of annual earnings to dividend payments, while Lowe's target is around 35%. While the possibility of a dividend pause or reduction during a severe downturn exists, as witnessed in the Great Recession, Home Depot's cash position remains robust, unlike Lowe's, which has maintained its dividend streak for over 25 consecutive years.
Valuation Considerations
Despite a discount from its peak valuation in late 2022, Home Depot's shares are not characterized as inexpensive. Priced at 2.3 times sales, the company commands a premium compared to Lowe's, which is valued at 1.4 times sales. This premium extends to earnings as well, with Home Depot valued at 23 times earnings, in contrast to Lowe's 17 times earnings.
While the price may not be considered a bargain, the higher valuation comes with significant perks. Home Depot offers a more generous dividend and demonstrates greater resilience in navigating diverse market conditions. For risk-averse investors, monitoring the stock for potential price fluctuations in 2024 could be prudent. Nonetheless, Home Depot remains poised to deliver favorable long-term returns for patient shareholders.
As long as the price is above 337.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 358.04
- Take Profit 1: 370.00
- Take Profit 2: 390.00
Alternative scenario:
If the level of 337.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 337.00
- Take Profit 1: 325.00
- Take Profit 2: 310.00
