- Shares are down more than 33% from their high.
- Home Depot has benefited from pandemic spending.
- Higher interest rates and consumer spending could send stocks further down.
- Number of stores 2316 with a total area of 240 million square meters..
Home Depot (NYSE: HD) has dropped significantly from its 52-week high and may have peaked for now. The company has benefited from the pandemic as much of the population has taken advantage of being homebound to work on home-related projects such as painting, repairing and replacing old appliances. Shares are down (-33%) from their pandemic high and are facing multiple challenges, including a broader economic slowdown on the horizon and rising interest rates, both of which are putting pressure on stocks.
Home Depot has historically been a mixed bag, sitting in between discretionary consumer products and basic consumer products. Stocks tend to perform better than typical discretionary consumer stocks but underperform in the broader consumer goods market.
Home Depot primarily serves contractors, but with a slowdown in the housing market, reduced construction and housing activity, contractors may be cutting back on their costs. As a result, the current environment is unfavorable for stocks, but long-term fundamentals make stocks interesting.
Home Depot outlook in 2022
The housing market continues to slow down as the Fed raises interest rates. 10-year Treasuries rose to more than 3.4%, with the latest inflation data coming in higher than expected and mortgage rates above 6%. As a result, house prices have already shown declines, with key markets showing declines. Analysts believe that many regional markets in the US can be seen anywhere 15-20% price reduction, which will no doubt affect demand for Home Depot products as consumer sentiment turns cautious. In addition, consumer sentiment remained weak and, given the latest report, reading 50.2consumer companies, in turn, may also see a slowdown in earnings.
Profit and valuation
Earnings per share rose $4 per share in the first quarter, up 6% from the same quarter in 2021. Meanwhile, revenue was $38.9 billion, up 4% from last year. Gross margin remained virtually unchanged at 33.8% and operating margin was also flat at 15.6%. However, pressure on margins could ease in the coming quarters as management offsets part of the costs, which could push operating margins above 16%.
Home Depot is definitely not cheap; with a 17x increase in profits and earnings that could turn negative in the second half of the year, stocks could come under further pressure, hitting new lows. Analysts currently estimate annual revenue could be around $156 billion, up 2.5% from 2021.
The future of home storage
Homeownership rates have risen by over 1.5% in the last couple of years as more and more people are looking for homeownership instead of renting. As mortgage rates have risen to levels not seen since 2006, home ownership has become much more expensive, and unless home prices fall (as they should), housing demand is likely to remain low for some time. In addition, mortgage default rates are also starting to rise, especially in the subprime category. Although subprime mortgages as a percentage of total mortgages have declined since the last major recession in 2008, rising defaults remain a problem. In addition, home prices will likely need to correct by 25-30% from recent highs in order for buyers to re-enter the market in any meaningful way. Overall, the housing and home improvement market is likely to remain subdued for some time.
Home Depot management continued to reiterate that the backlog of home improvements remains significant and that the market has great potential. Home Depot is currently focused on improving connectivity through increased distribution centers as it seeks to improve operational efficiency and profits as management targets contractors through its new warehouses. The strategy of building so-called “flat” distribution centers can pay off in the long run, as greater access to local networks will help increase revenue.
Should You Consider Home Depot?
Home Depot stock is facing numerous downsides as it seeks to manage an unprecedented macroeconomic environment. While the stock should hold up better than many stocks in the broader market, it could still fall further in the short term. However, in the long term, stocks remain a relatively reliable defensive play. If stocks correct further, they may have value and become part of a defensive portfolio.