HD with Nobias Technology: Case Study on Home Depot
Nobias recently published a report on Wal-Mart’s (WMT) historic sell-off. WMT shares are down nearly 25.9% from their 52-week highs after falling more than 19.7% during the last week alone, representing the company’s worst weekly losses since the flash crash in 1987. This sell-off was largely inspired by the disappointing guidance that Wal-Mart provided during its recent Q1 report. WMT management made it clear to investors that inflation was hurting its margins and therefore, eating away at its profits.
And, in recent weeks, Wal-Mart isn’t the only major retailer that has struggled. Shares of Target (TGT) were down 28.74% last week. Ross Stores (ROST) sold off 21.2% last week. Williams-Sonoma (WSM) saw its shares fall double digits, down 12.3% last week. And, the retail weakness even reached into the more defensive grocery space, with Kroger (KR) seeing its shares dip by 8.65% during the last 5 trading sessions.
Yet, looking across the retail landscape, there is a relative outperformer that has begun to shine, relative to its peers (and the broader market at large). Home Depot (HD) shares were only down 1.97% last week (during a period of time when the S&P 500 fell by 2.87%).
Like so many of its peers in the retail space, HD shares are down well off of their all-time highs. HD’s 52-week high is $420.61 and today, shares trade for $287.19. Yet, since reporting first quarter numbers a couple of weeks ago, it’s clear that this home improvement retailer is a bright spot in the retail landscape, providing investors with a potential safe haven in the storm that is currently being created by rampant inflation.
BRK.B May 2022
Dani Romero, a Nobias 5-star rated author, published an article on Yahoo Finance recently which focused on the negative impact that inflation is having on the retail sector as a whole. Romero wrote, “Inflation appears to be spilling into all parts of the economy, with one primary reason being ongoing supply chain constraints.”
She interviewed former Home Depot CEO Bob Nardelli, who said, “Inflation is inseparably linked to the supply chain. look at a global view of the container ships around the world and we have well over 550 ships right now floating on the water waiting to get unloaded. We have an equal number of tankers floating on the water ready to get unloaded."
Romero stated, “The pandemic created the perfect storm to disrupt supply chains: Port backups, container shortages, and other supply chain nightmares meant that retailers and brands were largely put at the mercy of forces outside their control.” And, Nardelli provided a bleak outlook, saying, "Supply chain has caught every company off guard here, and I just don't see it getting better.”
Romero said that China “holds the cards” with regard to its potential to improve the current situation, noting that, “A fifth of the world’s containerships are stuck in congested ports, according to Windward data, and a quarter of those "stuck ships" are at Chinese ports. Since February, the number of container vessels waiting outside of Chinese ports has risen by 195%.”
Because of these backups, she noted that research firm Resilinc recently said that it costs “roughly twice as much” to ship a container across the Pacific than it did one year ago. But, she continued, “Home Depot (HD) seems to be weathering these challenges surprisingly well.” Romero said, “Sales rose nearly 4% from a year ago to $38.9 billion and were the highest-ever for the first quarter in the company's history.”
Mike Robinson, a Nobias 4-star rated author, reported on Home Depot’s Q1 report recently at The Street Register. He touched upon the stock’s recent underperformance, stating, “Home Depot shares have fallen 28% since the start of the year. However, they are still below 29.63% of its 52-week high of $420.61 on December 6, 2021. They are under-performing the S&P 500 which is down 15.91% from the start of the year.”
Regarding the Q1 results, Robinson wrote, “Home Depot posted earnings per share (EPS) of $4.09 for revenue $38.91B. Investing.com polled analysts and predicted EPS at $3.68 for revenue $36.57B.” In a separate article that Robinson published focused on HD’s Q1 data, he said, “Analysts expected to see a drop of 2.2% in comparable sales, but the 2.2% increase was 31% YoY. The U.S. sales of comparable products rose 1.7% in the quarter, an increase of 29.9% YoY. This beats the predicted decline by 1.75%. The average ticket sale was $91.72, an increase of 11% over the previous year.”
Robinson quoted the company’s report which stated, “The solid performance in the quarter is even more impressive as we were comparing against last year’s historic growth and faced a slower start to spring this year.”
Robinson noted that HD provided forward guidance during its earnings update, writing, “HD anticipates EPS growth of the low single digits for the entire fiscal 2023. This is in contrast to the previous forecast that saw EPS growth in high-single digits. Similar sales will rise by roughly 3 percent, compared to 1.45% as previously anticipated.”
Michele Chapman, a Nobias 5-star rated author, also highlighted HD’s results, touching upon the home improvement retailer's performance in a tough housing market, writing, “Home Depot has continued to lure customers despite what may be a cooling of the housing market. Sales of previously occupied U.S. homes slowed in March to the slowest pace in nearly two years as a swift rise in mortgage rates and record-high prices discouraged would-be homebuyers.” She wrote, “Existing home sales fell 2.7% last month from February to a seasonally adjusted annual rate of 5.77 million, the National Association of Realtors said.”
Regarding the housing market, she continued, “Last week mortgage buyer Freddie Mac reported that the 30-year rate ticked up to 5.3% from 5.27% a week earlier. By contrast, the average rate stood at 2.94% a year ago.”
Regarding the relative performance that HD posted during the quarter, Chapman wrote, “The quarterly sales exhibited the slowest pace of growth in two years, noted Neil Saunders, managing director of GlobalData, adding that it was still a pretty good quarter and that the company has managed to keep all the gains it made during the pandemic.”
Chapman continued to quote Saunders, who said, “We do not see an enormous collapse in demand as many households are still willing to invest in and improve their homes; but there is a definite softening on the cards which we have not seen for quite some time.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Although rising mortgage rates have slowed down home buying in recent weeks, Mary Meisenzahl, a Nobias 4-star rated author, recently put a spotlight on HD management’s commentary, which suggests that the current housing market isn’t all bad for the retailer’s outlook. She wrote, “In the future, however, some experts are predicting a slowdown coming for the housing market, which could have an impact on Home Depot's bread and butter business of home improvement.”
However, Meisenzahl quoted HD’s CFO Richard McPhail, who provided bullish commentary on the company’s earnings call. She wrote, “According to McPhail, Home Depot's homeowner customers are more likely to invest in improving their homes as values increase, and prices have increased at the fastest rate in over 40 years.”
Overall, the vast majority of credible authors that Nobias tracks continue to express “Bullish” bias when it comes to Home Depot shares, with 93% of recent articles providing a positive outlook. Looking at reports published by the credible Wall Street analysts that the Nobias algorithm tracks, the average price target currently being applied to HD shares is $346.10. Today, HD trades for $287.19; therefore, this $346.10 fair value target implies upside potential of approximately 15.2%.
Disclosure: Of the stocks discussed in this article, Nicholas Ward is long HD. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.