Is Home Depot Stock Still A Buy?
Investing.com | Oct 14, 2021 15:41
Home-improvement giant Home Depot (NYSE:HD) has been a winning bet during the pandemic. Its share price reached a record high amid the housing market boom and low interest rates, two developments that lured Americans to spend more on their homes.
Home Depot and its peers benefited immensely from this shift. They posted strong earnings in the past seven quarters, fuelling a powerful rally in their share prices. But that trend is reversing fast as the economy opens and homeowners move their spending from do-it-yourself projects to other avenues, like travel and outdoor entertainment.
Home Depot reported same-store sales, a key metric in retail, rising 4.5% in the period ended Aug. 1, missing the 5.6% average of analysts' estimates. Same-store sales soared more than 20% in the previous four quarters, showing a historic expansion for the Atlanta-based retailer.
With slowing sales, HD is also facing other challenges. Higher shipping costs and supply disruptions are forcing many retailers to review their business plans and reduce their sales forecasts. While many competitors have released a forecast, Home Depot again declined to do so in August, citing continued uncertainty from the pandemic.
These uncertainties have stopped HD stock’s upward journey as investors fear a slowdown in the business momentum going forward. Since August stock has hardly budged, after gaining 27% for the year.
Though the majority of analysts in an survey gave an “outperform” rating to HD stock, they don’t see major appreciation in its price during the next 12 months.
Goldman Sachs, which is one of the most bullish banks on HD, said in a recent note the company will continue to generate growth even compared with the strong results last year.
Its note stated:
“We believe that despite the tough compares the company will face in 2H21 (like the rest of retail), HD has so far shown an ability to ‘comp the comp,’ generating positive comps in 2Q21 ... and continuing to see a positive comp the first two weeks of 3Q.”
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Goldman raised its price target to $390 per share from $376, a 15% upside potential where the stock closed on Wednesday. This was the highest among major Wall Street analysts, according to FactSet.
The note from Goldman said:
“Home Depot management believes that as home values increase, consumers become more and more likely to reinvest back into their homes, driving demand for the home improvement category.”
While spending by the DIY segment declines, business from professional contractors is picking up. The last quarter was the second quarter since the start of the pandemic where spend from pro customers outpaced that from the DIY customers.
The shift is beneficial for the company, Home Depot chief financial officer Richard McPhail told Bloomberg:
“At the end of the day, it’s all home improvement demand. It always winds up in the consumer’s home. It’s really just how the consumer is choosing to complete their projects.”
Bottom Line
There is no doubt that the major upward move in HD stock is over in the current cycle as spending patterns normalize in the post-pandemic environment. That being said, Home Depot is a solid dividend-paying stock that will continue to benefit from the US housing market and its economic strength.
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