Source: PaxForex Premium Analytics Portal, Fundamental Insight
Home Depot shareholders have certainly had a memorable 2022. Through mid-December, shares were down 22%, the worst performance of the S&P 500. Home Depot also did not outperform its smaller competitor, Lowe's Companies.
However, strong investment gains are not measured in such short time frames. With a broader focus in mind, let's take a look at where Home Depot could take shareholders in the next few years.
Home Depot's operating performance in 2022 suggests that the company will achieve solid growth even during a volatile housing market. In the most recent quarter, sales were up 4 percent, on top of a huge increase a year ago.
The retailer's popularity with professional contractors has helped it maintain strong revenue growth even as consumers cut back on home improvement projects. Lowe's, which is less popular with professionals, has seen weaker sales during the current downturn.
Nevertheless, both companies are struggling with falling customer traffic, which means slow growth is likely for most of 2023. However, Home Depot's long track record of the increasing market share means it will lead the industry during the next upturn.
Home Depot's advantageous position in the industry means higher earnings growth than its peers, which should help boost returns for investors. This fiscal year, the company expects to achieve an operating profit margin of nearly 15%, compared with Lowe's of 13%.
But there is some bad news. Home Depot's industry-leading return on invested capital (ROIC) has been supported in recent years by access to cheap cash.
With rising interest rates, that era appears to be over. As a result, investors can expect pressure on ROIC, which has risen to more than 40% of sales from the 9% of sales it was at during the worst of the housing market crisis.
The weaker results here will manifest themselves directly in slower cash returns. Home Depot may not spend as aggressively on stock repurchases, which totaled $15 billion last fiscal year.
Investors should not let this short-term volatility distract them from an otherwise stellar business. Yes, Home Depot sales could suffer during any downturn in the housing market. And earnings growth could be weaker, even if the economy continues to grow at a slow pace thanks to rising interest rates.
But the home improvement giant has a good chance of gaining market share under any market conditions in the next few years. Its excellent financial performance also gives hope that dividends will continue to grow, as they have for more than a decade.
Keeping an eye on these trends will help you focus on the overall outlook rather than the volatility that is likely over the next few quarters. This long-term focus is the surest path to skyrocketing returns for investors, whatever the next few months bring to Home Depot's business.
While the price is above 310.00, follow the recommendations below
- Time frame: D1
- Recommendation: long position
- Entry point: 323.14
- Take Profit 1: 330.00
- Take Profit 2: 345.00
Alternative scenario:
If the level 310.00 is broken-down, follow the recommendations below
- Time frame: D1
- Recommendation: short position
- Entry point: 310.00
- Take Profit 1: 300.00
- Take Profit 2: 290.00
