November 14, 2023, $288.07 (November 13 close)
Business Overview:
- Home Depot, Inc. operates a chain of 2,322 retail building supply and home improvement warehouse stores across the U.S., Canada, and Mexico (as of January 29, 2023). Acquired Hughes Supply in January 2006. The average store size is approximately 104,000 sq. ft. indoor plus a 24,000 sq. ft. garden center, stocking about 35,000 items. Product lines include building materials, lumber, floor/wall coverings, plumbing, heating, electrical, paint, furniture, seasonal and specialty items, hardware, and tools. The company has around 471,600 employees and is based in Atlanta, GA.
Maverick Guidance:
- Short-term technical buy/sell recommendation: AVOID
- Long-term portfolio recommendation: AVOID
- Stellar performance for the past decade peaked in 2023 with the January quarter (end of FY2022). Because of Fed tightening and the lower consumer savings and available funds, the FY2023 and FY2024 will be challenging.
- Analyst Consensus NTM PE at 20 is too high. With FY2023 earnings of $15 and a 16 PE, the 12-month target I have is $240. With a hard-landing recession in 2024-2025, my 24-month target is $180.
- Home Depot is a great company that will suffer during tough economic times and higher mortgage costs for house buyers and renovators.
Consideration for Maverick Portfolio:
- Home Depot (HD) is appropriate for any Maverick risk profile during a normal economic backdrop.
- Due to the anticipated economic recession in the US, confirmed by current technical analysis, HD shares must be avoided.
- Long-term purchases will be avoided until the Monthly RSI-14 dips into the next ACCUMULATION ZONE (below 30 on the monthly price series data and possibly below 20). The Monthly RSI-14 is presently 48.2.
Market Guidance:
- Consensus Analyst Ratings— MarketBeat = Moderate Buy, TipRanks = Moderate Buy
- 24 Wall Street analysts have offered 12-month price targets in the last 3 months. There are 14 Buy, 10 Hold, and zero Sell. (from TipRanks)
- Based on 24 Wall Street analysts offering 12-month price targets in the last 3 months, the average price target is $340.71, with a high forecast of $384.00 and a low forecast of $302.00. The average price target represents an 18.3% change from the last price of $288.07. (from TipRanks)
- Dividend Yield: $2.09 per share paid quarterly to yield 2.80%.
- Dividend growth for over 15 years. (from TipRanks)
- Technical Sentiment (based on Technical Indicators and Moving Averages):
- Investing.com = Daily (STRONG SELL) and Weekly (STRONG SELL)
- TipRanks = Daily (SELL) and Weekly (SELL)
Value Line Guidance:
- Company Financial Strength Rating: A++
- Share Price Safety, Market Timing, Technical Rank: 1=best. 5=worst
- Share Price Safety: 1 of 5
- Market Timing: 2 of 5
- Technical Rank: 2 of 5
- Beta: 0.95
- Stock’s Price Stability: 95/100
- Price Growth Persistence: 90/100
- Earnings Predictability: 100/100
- Projected Average Annual PE: 20
- Average Annual Sales Growth in the past 5 years: +15.5%
- Average Annual Sales Growth for the next 5 years: +6.5%
- Average Annual Cash Flow Growth in the past 5 years: +16.5%
- Average Annual Cash Flow Growth for the next 5 years: +6.5%
- Average Annual Earnings Growth in the past 5 years: +18.0%
- Average Annual Earnings Growth for the next 5 years: +6.5%
- Average Annual Dividend Growth in the past 5 years: +18.5%
- Average Annual Dividend Growth next 5 years: +7.0%
- Projected Average Annual Dividend Yield in 3 to 5 years: +2.5%
Financial Performance
- 10-year Average Annual Total Return: +16.80% (through November 10, 2023) (5th best in the Dow 30)
- EPS
- 2020: $11.94
- 2021: $15.53
- 2022: $16.69
- 2023: e$15.25
- 2024: e$16.10 (from Value Line Quarterly Report)
- Average Annual PE: 17 (VL Quarterly Report)
- PEG Ratio: 62 (FinViz)
- Beta: 93 (FinViz)
Quarterly Reports Summaries (including Revenue, Cash Flow, Earnings):
3Q2023 Quarterly Report Summary (October) (Reported November 14)
- Reported sales of $37.7 billion for the third quarter of fiscal 2023, a -3.1% decrease from the same period in FY2022.
- Comparable US sales for 3QFY2023 decreased by -3.5%.
- Net earnings for the third quarter of fiscal 2023 were $3.8 billion, or $3.81 per diluted share, beating estimates of $3.75, compared to 3QFY2022, $4.3 billion, or $4.24 per diluted share.
- Fiscal 2023 guidance narrowed:
- Sales and comparable sales are expected to decline between -3% and -4% compared to fiscal 2022.
- The operating margin rate is projected to be between 14.2% and 14.1%.
- The tax rate is estimated at approximately 24.5%.
- Interest expense of around $1.8 billion.
- A diluted earnings-per-share decline between -9% and -11% compared to fiscal 2022.
- Full-year guidance adjustment and the prospect of the first annual sales drop since 2009 did not prevent a +1.9% stock price increase in premarket trading.
- While not optimistic, the revised guidance narrowed the worst-case scenario, potentially viewed positively by investors given economic uncertainties.
- CEO Ted Decker acknowledged continued customer engagement in smaller projects but noted pressure in certain big-ticket, discretionary categories.
2Q2023 Quarterly Report (July)
- Sales were down 2% year-over-year in the July quarter.
- Comparable store sales declined by -2%, contrary to an expected -4% decline.
- Customers shifted to smaller ticket items amid a slowdown in existing home sales.
- Higher mortgage rates and expensive homes impacted home improvement spending.
- Big-ticket product sales (items over $1,000) saw a -5% decline in the past 12 months.
- Lumber prices fell 40%, reducing sales by about -1%, but overall revenues remained healthy.
- Management invested $1 billion in labor force retention and training, affecting margins.
- Earnings were $0.20 per share, surpassing forecasts in the July period.
- Expansion potential is highlighted with an addressable market of $950 billion annually.
- The housing shortage in the US is expected to support long-term results.
- Approved an additional $15 billion share repurchase, retiring over 20 million shares this year.
- Home Depot shares ranked to outperform in the coming year.
- Anticipated first annual sales decline in over a decade due to economic uncertainty.
- The highest Safety ranking and above-average dividend yield make it attractive on a risk-adjusted basis.
- Suggested waiting for a better entry point before initiating new positions.
1Q2023 Quarterly Report (April)
- Home Depot is expected to report declining sales for fiscal 2023, breaking a decade-long trend.
- Comparable-store sales in the first quarter decreased by -4.5%, leading to a -4.2% reduction in overall sales.
- Sales decline occurred despite an inflationary environment that boosted overall prices.
- Do It Yourself (DIY), and the Professional divisions experienced declines year-over-year.
- Factors contributing to the sales weakness included adverse weather on the West Coast, declining lumber prices, and economic uncertainty.
- Softness initiated in big-ticket items like patios and appliances, spreading to other segments.
- Residential construction business and remodeling spending stalled due to a sharp rise in mortgage rates, impacting home sales.
- Sales are projected to fall -3.5% in 2023.
- Management is investing $1 billion in workforce wages to attract and retain trained employees.
- Higher wages impact the bottom line amid sales softness, leading to an expected nearly 10% drop in earnings per share to $15.05 from 2022.
- Neutrally ranked Home Depot shares holding up well despite anticipated earnings decline.
- A large share repurchase program, above-average dividend yield, and a healthy balance sheet support the stock.
- Total return potential over the next 3 to 5 years is below average.
- A general housing shortage could position Home Depot well once mortgage rates decline, but earnings per share may not exceed 2022 record results until 2025.
- Continued inflation, lower disposable income, and an uncertain economic outlook might offer a better entry point for investors before operational improvement.
4Q2022 Quarterly Report (January)
- Home Depot shares have faced pressure since the last report, declining -15% due to a slightly softer fiscal 2022 earnings report.
- Management’s announcement of rising employee wages impacting profit growth in the coming year contributed to the sharp decline.
- Efforts to increase compensation for hourly workers and place additional managers on store floors to enhance customer experiences will cost $1.0 billion in 2023, reducing profits by about -$0.70 per share after taxes.
- Full-year earnings are expected to decline by 5%, contrary to the previous forecast of +4% growth.
- Anemic sales trends are likely to persist, with same-store sales increasing by 0.3% year-over-year in the January quarter.
- Average tickets rose by +5.8% to $90 per store visit, but visits dropped by -6%.
- Higher mortgage rates slow home sales and related preparation and remodeling.
- Economic growth is slow and uncertain, contributing to ongoing sales challenges.
- Anticipated flat overall revenues for the full year 2023.
- Home Depot shares neutrally ranked for Timeliness.
- Despite a modest bottom-line decline, profits are expected to remain healthy.
- On a risk-adjusted basis, long-term investors are advised to continue holding the stock.
- There is a housing shortage in the US, and as inflation is controlled, the potential for the Federal Reserve to reduce interest rates benefits the company.
- An above-average dividend yield is expected to support the shares.
The 3-to-5-year Operational and Financial Outlook:
- Longer-term capital appreciation potential over the next 3 to 5 years is modestly below average.
- The 3-to-5-year outlook indicates modest concerns over continued growth in revenue and earnings.
Company SWOT Analysis:
- Consider whether changes in any of these factors are a reason to invest or sell your investment in this company. There is no need to be guided by self-conflicted and highly biased Wall Street.
Internal Strategic Factors:
Home Depot’s Strengths
- Largest Retailer: Home Depot’s status as the largest home improvement retailer provides advantages in economies of scale, competitive defense, and market share protection.
- Highly Profitable: The company’s consistent increase in net income margin over the years, reflecting strong profitability, enables financial resource accumulation for core activities.
- Value for Money: Home Depot’s commitment to offering competitive prices, including a price-matching program, emphasizes value for customers’ money.
- Widest Variety: Home Depot provides a diverse range of home improvement products under one roof, from tools to construction materials, fixtures, and more.
- Excellent Customer Service: The company fosters a culture of excellent customer service, empowering employees through recognition, which enhances the overall shopping experience.
- Effective BOPIS Strategy: Home Depot’s effective Buy Online, Pick Up In Store (BOPIS) strategy significantly contributes to its profitability and growth.
- Increased Focus on eCommerce: The company’s strategic shift towards eCommerce and digital transformation has resulted in substantial growth in online sales.
- Great HR Policies: Home Depot’s employee-focused policies, such as paying college fees, contribute to retaining high-performing employees.
- Loyal Customer Base: Home Depot’s customer-centric approach has built a loyal customer base, with many customers visiting the same store for years.
- Eco-friendly Options: Home Depot’s ECO Program offers eco-friendly choices, appealing to environmentally conscious consumers.
- Valuable Brand: Home Depot’s focus on brand-building has resulted in a ranking as the 32nd most valuable brand in the world.
Home Depot’s Weaknesses
- Lack of Geographical Diversification: Home Depot’s overreliance on North America, particularly the US and Canada, poses a significant weakness as these markets mature.
- Lack of International Expansion: Despite being the largest home improvement retailer in the U.S., Home Depot’s limited international presence in Mexico reveals a missed opportunity for expansion.
- Aging Infrastructure: The company faces challenges related to aging infrastructure, which have affected digital transformation efforts.
- Late eCommerce Adoption: While Home Depot has witnessed growth in online sales, its late adoption of eCommerce compared to competitors represents a missed growth opportunity.
External Strategic Factors:
Home Depot’s Opportunities
- Expand Beyond North America: Home Depot should consider expanding into emerging markets like India and China to tap into new growth opportunities beyond North America.
- Increase Online Sales: Home Depot’s online sales currently account for around 6% of its business, below the industry average of 10%. There is significant potential for growth in online sales, which can be a competitive advantage.
- Exploit Home Décor: Home Depot can take advantage of the growing home décor sector by leveraging its acquisition of The Company Store. This provides an opportunity to capitalize on competitors’ challenges in this segment.
- Expand via Partnerships: To enter emerging markets successfully, Home Depot can establish partnerships with local home improvement retailers who better understand the market.
- Grow through Acquisitions: Acquiring struggling brands like Bed, Bath & Beyond can help Home Depot enter new market segments and catalyze its growth.
- Diversify Offering: Home Depot can diversify its offerings by venturing into furnishing and interior design solutions to provide domestic customers with complete home décor and furnishing solutions.
- Online Sales Promotion: Improving the online shopping experience can save customers time and money, making online sales more efficient and customer-friendly. Home Depot should promote its online sales to reach a wider customer base.
Home Depot’s Threats
- Intense Competition: Lowe’s and Amazon are significant competitors challenging Home Depot’s market share. The narrowing gap between Home Depot and Lowe’s poses a threat.
- Looming Recession: Economic challenges and a potential recession after the pandemic may lead to scaled-down or postponed major construction and home improvement projects, impacting Home Depot’s year-over-year profit increase.
- Price Deflation: Significant drops in lumber prices, which account for 18% of Home Depot’s total revenue, have already impacted the company’s performance and ability to meet expectations.
- Possibility of Strikes: The strengthening bargaining power of employees, especially with adopting the USMCA, poses a risk. Employees like those in Mexico have demanded higher pay, potentially leading to strikes.
- Employee Strikes: Worker strikes can disrupt operations and lead to sales decline. Recent demands for a 20% pay hike and threats to strike in multiple states highlight the vulnerability of Home Depot to labor stoppages.
- Heavy Reliance on North American Market: Home Depot’s sole dependence on the North American market, with nearly 2000 stores in the U.S., exposes the company to risks associated with economic recessions in the U.S. Limited access to global markets can also be seen as a threat in an era of globalization.
FinViz Snapshot: https://finviz.com/screener.ashx?v=341&t=HD
10-Year Historical Price Chart:
Point & Figure Chart:
https://stockcharts.com/freecharts/pnf.php?c=HD,PWTAWANRNO[PA][D][F1!3!!!2!20]
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