After Earnings, Is Home Depot Stock a Buy, a Sell, or Fairly Valued?

Home Depot HD released its fiscal first-quarter earnings report on May 14. Here’s Morningstar’s take on Home Depot’s earnings and stock.

Key Morningstar Metrics for Home Depot

• Fair Value Estimate: $265.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Home Depot’s fiscal Q1 Earnings

• Overall, Home Depot’s first-quarter results were in line with our expectations. Its comparable store sales dropped 2.8% (although up 70 basis points sequentially), with big-ticket comparable transactions showing more pressures (down 6.5%) due to the weak macro environment.
• However, we continue to think comparable sales growth should be positive again toward the end of fiscal 2024 as it laps negative year-over-year comparisons and consumers re-engage in discretionary pull-forward categories throughout the year.
• We bumped our fair value estimate to $265 per share from $263 to account for the time value impact. Still, Home Depot shares look overpriced, trading at roughly a 30% premium to our intrinsic valuation.

Fair Value Estimate for Home Depot Stock

With its 2-star rating, we believe Home Depot’s stock is overvalued compared with our long-term fair value estimate of $265 per share. For fiscal 2024, we expect roughly $154 billion in sales, a 14.1% operating margin, and $15.31 in earnings per share.

Given the maturity of the domestic home improvement industry, we expect demand to largely depend on changes in the real estate market, driven by prices, interest rates, turnover, and lending standards. We project 3.5% average sales growth over the next five years, supported by 2.7% average same-store sales increases and helped by offerings like buy online/pick up in-store and better merchandising, which drives market share gains.

Read more about Home Depot’s fair value estimate.

Economic Moat Rating

We assign Home Depot a wide moat rating. As the largest global home improvement retailer, Home Depot possesses a competitive edge owing to its brand intangible asset and cost advantage. Over the past 10 years, Home Depot’s sales growth has outpaced its industry’s average growth of 5.3% by 170 basis points annually. We surmise the company’s strong brand equity and extensive scale should enable incremental market share gains in the highly fragmented $950 billion North American home improvement market, on top of the 16% market share it has amassed thus far (given roughly $153 billion in sales in 2023).

Read more about Home Depot’s economic moat.

Financial Strength

Home Depot has had no concerns tapping the credit markets to finance the business in recent years. After nearly $2 billion of debt raised in 2023 (and roughly $1.3 billion in repayments), the firm ended January 2024 with a total debt load of around $43 billion. We aren’t concerned about near-term cash constraints, as forward debt maturities are staggered, with just $1.4 billion of debt maturing in the next 12 months. Moreover, EBIT is forecast to cover the net interest expense 12 times at the end of 2024.

Given Home Depot’s ability to generate tremendous free cash flow to the firm (we forecast more than $16 billion in 2024), we expect management will have no problem facilitating dividend payments and remaining near its long-term dividend payout ratio target of 55%. Share repurchases should continue, with the new $15 billion share repurchase program authorized in August 2023.

Read more about Home Depot’s financial strength.

Risk and Uncertainty

We give Home Depot a Medium Uncertainty Rating, owing to its strong brand recognition, which has helped stabilize sales through the cycle. Sales are largely driven by greater consumer willingness to spend on category goods, with stable existing-home price growth and decent turnover. Thanks to the maintenance, repair, and operations business, pro revenue could be less cyclical, as the maintenance side can prove more consistent. In uncertain economic times, consumers remain in their homes, embarking on improvement projects and boosting do-it-yourself revenue. Alternatively, when home prices rise, the wealth effect generates a psychological boost, reinvigorating professional sales thanks to a higher willingness to spend on big projects. A diverse consumer base helps normalize revenue even in uneven times. Currently, about half of sales are in the do-it-yourself arena, while the rest is generated from the pro customer.

Read more about Home Depot’s risk and uncertainty.

HD Bulls Say

• Home Depot’s continued investments in supply chain and merchandising should improve productivity and support its leadership in the home improvement market.
• The company has returned $73 billion to shareholders through dividends and share buybacks over the past five years, nearly 20% of its market cap. In our outlook, we forecast Home Depot to return nearly $85 billion to shareholders over the next five years.
• The addressable MRO market is around $100 billion, and Interline and HD Supply make up a low-double-digit share, leaving meaningful upside up for grabs.

HD Bears Say

• Weak consumer spending, higher interest rates, or an economic downturn could hinder sales for home improvement projects and affect Home Depot’s growth.
• IT and supply chain improvement gains could prove more challenging to achieve, as simpler efforts have already borne fruit. Further productivity efforts could face some implementation risks, creating inconsistent profitability.
• As home improvement demand continues normalizing, consumers could shift discretionary spending away from home improvements into other discretionary categories.

This article was compiled by Sokhoeun Noeut.