Source: PaxForex Premium Analytics Portal, Fundamental Insight
The previous several months have not been quite advantageous for large retailers. Declining consumer demand in the face of high inflation combined with an impending recession has put pressure on revenue growth. Increased advertising activity to get rid of growing inventory is also reducing profitability. All of this comes amid the start of the crucial holiday shopping season.
Home Depot, whose business is actually performing quite well, has not escaped the pessimism of the market. Since the stock is down 25 percent from its peak in December 2021, investors should take a closer look at buying Home Depot today.
In the third quarter of fiscal 2022, Home Depot generated revenue of $38.9 billion, up 5.6% YoY, and diluted earnings per share (EPS) of $4.24, up 8.2%. Same-store sales, a metric closely watched by retailers, rose 4.3%. The company surpassed Wall Street's expectations on both the top and bottom lines.
Not surprisingly, the most influential thesis of the quarter was how the present economic environment is affecting the company's operations. "We are operating in a broad inflation environment not seen in four decades while managing constrained global supply chain conditions, all against a backdrop of monetary policy changes designed to curb demand," Chief Financial Officer Richard McPhail said in the latest earnings call.
The company continues to record development in a challenging environment. Both DIY and Professional customer groups showed YoY growth. And while the number of transactions was down 4.3%, the average ticket size was up 8.8%. Sales per square foot were also up 5.3%, another positive trend.
There is no reason to believe that Home Depot's business will not be successful over the next five years and beyond. Sure, it may be more tied to the ups and downs of the economy because of its importance to the U.S. housing market, but the company is thriving over time. And that's not going to change.
"Despite near-term uncertainty, we believe that the long-term fundamentals of demand for home products remain strong and that we are well positioned to take advantage of our clear competitive advantages to take advantage of attractive growth opportunities in our area," CEO Ted Dekker said in a call.
Management maintained its full fiscal year guidance unchanged, projecting same-store sales growth of 3.0% and a mid-single-digit percentage increase in diluted earnings per share.
It's worth taking a step back to identify and assess Home Depot's competitive advantages. From a customer perspective, the company provides significant value in the form of a wide selection of products at low prices. Customers can go to regular thrift stores, but their selection and prices will not compare favorably to Home Depot's prices. This leads to a powerful branding of the company in the minds of customers.
With revenues of $157.3 billion in 12 months, Home Depot has a huge advantage in scale. This means that the company's size allows it to negotiate better terms with more than 10,000 suppliers, resulting in lower unit costs. And that leads to higher profitability. Between the third quarter of fiscal 2012 and fiscal 2022, Home Depot's operating margin rose from 9.6% to 15.8%.
Finally, Home Depot benefits from switching costs, at least when it comes to professional customers such as contractors and electricians. Professionals account for about half of the company's total revenue, and they rely on Home Depot's network of 2,319 stores as critical partners, providing the tools, supplies, and expertise they need when they need it. Professionals are less likely to move to another supplier once the relationship is established.
After dropping 25% this year, Home Depot stock is trading at a price-to-earnings (P/E) ratio of 18.8. This valuation is not only 17% below Home Depot's 10-year P/E average, but also below the S&P 500.
The market typically does not discount high-quality, industry-leading businesses that are still showing growth in this environment. Investors should jump at the opportunity to buy Home Depot stock right now.
As long as price is above 275.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 316.98
- Take Profit 1: 328.00
- Take Profit 2: 340.00
Alternative scenario:
If the level of 304.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 304.00
- Take Profit 1: 295.00
- Take Profit 2: 282.00
