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

Home Depot HD is set to release its first-quarter earnings report on May 20. Here’s Morningstar’s take on what to look for in 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

Earnings Release Date

Tuesday, May 20, before the start of trading

What to Watch in Home Depot’s Q1 Earnings

• With a majority of products sourced domestically, we aren’t particularly concerned about China tariffs, which seem to be a sticking point for numerous companies. We may hear a quantification of tariff impact on the bottom line, which shouldn’t materially impact our fair value estimate.
• W’ere hoping to hear how complex pro projects have trended, as consumers have generally become more hesitant to make larger purchases since the beginning of April, when tariffs were enacted.
• We’ll look for any change in overall industry growth expectations—including repairs and remodeling—as housing turnover remains depressed

Fair Value Estimate for Home Depot

With its 2-star rating, we believe Home Depot’s stock is 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.

Our long-term outlook remains unchanged. 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 4% average sales growth over the next decade after housing market stabilization boosts DIY spending back to historical levels, supported by 3.3% average same-store sales increases and helped by offerings like buy online/pick up in-store and better merchandising, which drives market share gains. In the longer term, we forecast gross margins to hold steady over the next decade (ending 2034 at around 34%) while the SG&A expense ratio remains flat (around 18% on average) as the firm capitalizes on its scale and supply chain improvement initiatives while investing to protect its market leadership perspective. This leads to a terminal operating margin of 14.8%, slightly above its prepandemic peak of 14.6%.

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 the US Census Bureau data), an indication of 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 was able to raise $10 billion in debt during the first half of 2024 in order to finance part of the $18.25 billion of 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.

Strong free cash flow to the firm that has averaged about 10% of sales over the past three years supports higher leverage, and we expect the company will stay within its targeted adjusted debt/EBITDAR metric of 2 times over the long term. The balance sheet’s more than $26 billion in net property, plant, and equipment provides an asset base to secure debt if necessary.

Read more about Home Depot’s financial strength.

Risk and Uncertainty

We give the company a Low Uncertainty Rating, owing to its strong brand recognition, which has helped stabilize sales through the cycle. Home Depot’s sales are largely driven by greater consumer willingness to spend on category goods in both necessary and discriminatory home purchases. Thanks to the maintenance, repair, and operations (MRO) and pro business (HD Supply and SRS), revenue could be less cyclical, as the maintenance side of the business 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 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 its supply chain and merchandising should improve productivity and support its market leadership position 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 a new end user, there is share 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 bore 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 Jacqueline Walker.