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Stock Analyst Update

Despite Drop, Home Depot's Stock Is Still Risky

Competitive issues may soon become more prominent.


What Happened?
Friday morning, Home Depot (HD) warned that it expects to miss First Call earnings estimates of $0.24 per share for the quarter ending January 28 by $0.04. The company blames the shortfall on colder-than-normal weather, persistently low lumber and building material prices, rising energy costs, a reverse wealth effect because of a stock market downturn, high consumer debt levels, and an overall slowdown in the economy. Management said it expects the slowdown to last for at least the first half of 2001.

What It Means for Investors
We've been saying for a while that we think Home Depot's problems run deeper than the company is admitting and that the stock looks overvalued. The company's 10%-off sale in late December reinforced our concerns that Home Depot was having trouble meeting its sales goals for the quarter because of a slowing U.S. economy. However, economic problems are usually short-term in nature, and we would not recommend that investors avoid a stock based solely on these factors.

Mark Sellers does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.