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

Home Depot HD released its fourth-quarter earnings report on Feb. 25. Here’s Morningstar’s take on Home Depot’s earnings and stock.

Key Morningstar Metrics for Home Depot

• Fair Value Estimate: $305.00
• Morningstar Rating: ★
• Economic Moat: Wide
• Morningstar Uncertainty Rating: Low

What We Thought of Home Depot’s Earnings

Home Depot posted better-than-expected fourth-quarter revenue despite concerns around the macro environment and consumer sentiment. Sales of $39.7 billion were above our $38.8 billion estimate, with comparable sales lifting 0.8%, marking the first positive quarter since 2022. The adjusted operating margin fell 40 basis points to 11.7% (below our 11.8% forecast) on costs related to the SRS integration, the impact of which should subside over the back half of 2025. We plan to maintain our $292 fair value estimate and see shares as nearly 35% overvalued, as we think the market is already pricing in the return of operating leverage when the housing market improves. This is likely to take some time, however, given Home Depot’s prognosis for depressed turnover and elevated interest rates to remain in 2025.

As such, with another year of high financing costs pressuring big remodel projects, the firm offered its inaugural 2025 outlook, which included sales growth of 2.8%, comparable sales growth of 1%, and an adjusted operating margin of 13.4%. We see near-term sales gains stemming from the pro side, as new capabilities should continue to result in increased engagement and incremental sales. Additionally, continued integration of SRS into the Home Depot ecosystem allows for further product cross-selling and expansion into new markets, helping uplift demand for more complex jobs.

Furthermore, the firm’s continuous improvement in delivery, customer insights, and digital options allows for a better consumer experience that attracts both pro and DIY customers (which we think supported Home Depot’s 0.9% growth in big-ticket transactions in the quarter). Longer term, as the housing market normalizes, we forecast 4% average top-line growth and operating margins that return to its 10-year historical average levels, at around 14%, as cost leverage resumes with the achievement of comparable sales above 3%.

Fair Value Estimate for Home Depot

With its 1-star rating, we believe Home Depot’s stock is significantly overvalued compared with our long-term fair value estimate of $305 per share. The company posted better-than-expected revenue, which grew 14% to $39.7 billion, and positive same-store sales growth of 0.8% for the first time since 2022. However, DIY consumers continue to feel pressure from high interest rates and macroeconomic uncertainty, resulting in management’s modest fiscal 2025 guidance of 1%-3% total sales growth, with comparable sales growing just 1%. We expect low housing turnover and macro uncertainty to persist in 2025 and will continue to weigh on DIY performance, as potential buyers wait for mortgage rates to come down.

Read more about Home Depot’s fair value estimate.

Economic Moat Rating

We assign Home Depot a wide economic moat. As the largest global home improvement retailer, we believe 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 the building materials and garden equipment and supplies dealer industry’s average growth of 5.4% by 150 basis points annually (based on US Census Bureau data), indicating the brand’s ongoing relevance. We surmise Home Depot’s strong brand equity and extensive scale should enable incremental market share gains in a highly fragmented $1 trillion North American home improvement market, on top of the nearly 16% market share it has amassed thus far (given more than $159 billion in sales in 2024).

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. The firm raised $10 billion in debt during the first half of 2024 to finance part of the $18.25 billion SRS Distribution acquisition. This left Home Depot with a total debt above $53 billion at the end of 2024. Management has halted share repurchases with higher expected debt service as a result of the SRS acquisition. However, we model share repurchases to resume historical pace in 2026 and beyond, with the new $15 billion share repurchase program authorized in August 2023. Including the impact of the SRS acquisition, EBIT is forecast to cover the net interest expense 10 times at the end of 2025.

Read more about Home Depot’s financial strength.

Risk and Uncertainty

We give Home Depot a Low 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 in necessary and discretionary home purchases. Thanks to the maintenance, repair, and operations and pro business (HD Supply and SRS), 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, boosting do-it-yourself revenue. Alternatively, when home prices rise, the wealth effect generates a psychological boost to consumers, reinvigorating professional sales thanks to a higher willingness to spend on big home improvement projects. A diverse consumer base helps normalize revenue even in uneven times. Currently, about half of sales are in the DIY 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 firm has returned $73 billion to its shareholders through dividends and share buybacks over the past five years, nearly 20% of its market cap. We forecast Home Depot returning around $77 billion to owners over the next five years.
• The addressable MRO market is about $150 billion. As Interline and HD Supply make up a low-double-digit share and SRS reaches new end users, share is 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 to normalize, consumers could continue to shift discretionary spending away from home improvements and allocate more income into other discretionary categories.

This article was compiled by Gautami Thombare.