Home Depot Earnings: Prudently Navigating Macro Pressures With Strategic Execution

We continue to view Home Depot’s stock as overvalued and consider its recent surge to be overdone.

Jaime M. Katz, CFA 20 February, 2024 | 3:00PM
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The Home Depot retail store.

Key Morningstar Metrics for Home Depot

What We Thought of Home Depot’s Earnings

Home Depot’s HD tepid fourth-quarter results reflect a flurry of macro pressures, including slow housing turnover and elevated mortgage rates. The firm’s net sales dropped 2.9% to $34.8 billion and its diluted earnings per share came in at $2.82, largely in line with our preprint forecast. The top-line decline was a byproduct of weaker customer transactions and average tickets, which contracted by 1.7% and 1.3%, respectively. Big-ticket purchases (those over $1,000) were especially slow, declining 6.9%.

The firm expects housing headwinds to persist, leading to declines of 1% in both comparable sales and EPS (excluding the 53rd week) in fiscal 2024. We intend to nudge our preprint 2024 growth forecasts of 2% for sales and 7% for EPS lower, but we don’t plan any material change to our long-term outlook or our fair value estimate of US$263 per share. As such, we continue to view Home Depot’s shares as overvalued (trading at a 28% premium to our existing intrinsic valuation) and consider their recent surge (in which they climbed nearly 20% over the past three months) to be overdone. Specifically, we believe the current share price implies expectations that far exceed our forecast for 4% annual sales growth (beyond fiscal 2024) and nearly 16% operating margins.

Against the murky housing backdrop, we view Home Depot’s persistent efforts to elevate the customer experience to be strategically cogent. These efforts include removing friction in its online channels and growing pro wallet share by building its outside salesforce and implementing new order management and digital capabilities. Combined with the firm’s robust scale, extensive store footprint, and selling apparatus (factors that underpin our wide moat rating), we believe Home Depot is poised to make meaningful strides in the underpenetrated and more complex pro market and chalk up share gains in the coming years.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
The Home Depot Inc335.36 USD0.74Rating

About Author

Jaime M. Katz, CFA

Jaime M. Katz, CFA  Jaime Katz, CFA, is a senior equity analyst for Morningstar.

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