Case Study: Home Depot (HD) stock according to high performing analysts
Key Points
Performance
Home Depot shares fell by 2.01% this week, pushing their year-to-date losses down to -6.09%. This compares poorly to the S&P 500 which is up by 3.82% thus far during 2023.
Event & Impact
Home Depot posted fourth quarter results this week, beating Wall Street estimates on the bottom-line, but missing estimates on the top-line. During Q4, HD’s revenue totaled $35.83 billion, missing Wall Street’s consensus estimate by $170 million. Home Depot’s Q4 GAAP earnings-per-share came in at $3.30, beating Wall Street’s consensus estimate by $0.02/share.
Noteworthy News:
Home Depot’s trailing earnings were essentially in-line with expectations and the company announced a 10% dividend increase during its Q4 report; however, management forward guidance, which called for negative mid-single digit EPS growth during 2023, spooked investors, causing a -2.0% sell-off on the week.
Nobias Insights
58% of recent articles published by credible authors on Home Depot shares offer a “bullish” bias. Yet, only two out of the four credible Wall Street analysts who cover HD believe prices are likely to rise in value. The average price target applied to Home Depot is $323.00, which implies upside potential of approximately 8.9% relative to the stock’s current share price of $296.66.
Bullish Take Mark Roussin, a Nobias 4-star rated author, said, “HD also happens to be one of my favorite dividend growth stocks as they have proven to generate tons of free cash flow which has led to a fast growing dividend.”
Bearish Take Marianne Wilson, a Nobias 4-star rated author, said, “For fiscal 2023, Home Depot expects sales to be flat versus fiscal 2022 and earnings per share to fall in the “mid-single digits” percentage range.”
O Feb 2023
Home Depot reported Q4 earnings this week, missing Wall Street’s estimates on the top-line, but beating consensus estimates on the bottom-line. The company also announced disappointing full-year guidance for 2023, calling for negative earnings-per-share growth over the coming 12 month period.
Home Depot is one of the largest physical retailers in the world with a $302 billion market cap, so it is often viewed as a bellwether, in terms of consumer health. During its Q4 earnings report, Home Depot announced its annual dividend increase for 2023, stating, “The Company today announced that its board of directors approved a 10 percent increase in its quarterly dividend to $2.09 per share, which equates to an annual dividend of $8.36 per share.”
However, this wasn’t enough to stop the stock from falling by 2.01% during the week. This negative weekly performance pushed Home Depot’s year-to-date losses down to -6.09%. This means that the stock has underperformed the S&P 500 by a wide margin thus far during 2023. Comparatively, the S&P 500 has posted gains of 3.82% on a year-to-date basis.
Bearish Nobias Credible Analysts Opinions:
Marianne Wilson, a Nobias 4-star rated author, covered Home Depot’s Q4 results in an article that she published at Chain Store Age this week. Looking at HD’s quarterly results, Wilson wrote, “Home Depot reported net earnings of $3.36 billion, or $3.30 per share, for the quarter ended Jan. 29, compared with net earnings of $3.35 billion, or $3.21 per share, in the year-ago period. Analysts had expected earnings of $3.28 per share.”
Moving onto the bottom-line, she said, “Sales inched up 0.3% to $35.83 billion, missing estimates of $35.97 billion. Home Depot attributed the miss to a decrease in lumber prices, which are significantly down from a year ago.”
Wilson continued, “The average ticket rose 5.8%, to $90.05, with the increase largely fueled by inflation. Total customer transactions dropped 6%.” “For the full year,” she said, “Home Depot has sales of $6.2 billion, up 4.1% from the year-ago period. Comparable sales increased 3.1% and comparable sales in the U.S. increased 2.9%.”
Looking at the full-year bottom-line results, Wilson said, “Net earnings for fiscal 2022 were $17.1 billion, or $16.69 per share, compared with net earnings of $16.4 billion, or $15.53 per share in fiscal 2021.” And finally, looking at management’s forward guidance, Wilson stated, “For fiscal 2023, Home Depot expects sales to be flat versus fiscal 2022 and earnings per share to fall in the “mid-single digits” percentage range.”
This negative bottom-line guidance for fiscal 2023 played a heavy role in the stock’s sell-off this week, but Wilson explained one of the reasons why HD expects to struggle to produce earnings growth this year. She said, “The Home Depot is boosting its employees' pay amid a still tight labor market for retailers.” The home improvement giant announced the increased compensation in its fourth-quarter earnings release in which it provided a flat outlook for the coming year,” she continued.
Providing details on HD's compensation plans, Wilson said, “Beginning in the first quarter of fiscal 2023, Home Depot will invest an additional approximately $1 billion in annualized compensation for frontline, hourly associates. (At the end of the fourth quarter, the company had a total of approximately 475,000 associates.)”
She mentioned that management called its employee base “a key differentiator and competitive advantage for the company” and therefore, by investing in higher wages and benefits for its staff, Home Depot management believes that it is setting itself up for long-term success.
Bullish Nobias Credible Analysts Opinions:
Geoff Considine, a Nobias 5-star rated author, also penned an article this week which put a spotlight on HD’s negative guidance and the stock’s recent sell-off. Regarding 2023 headwinds, Considine wrote, “Higher labor costs are, of course, is a negative. The volatility in lumber prices in the past several years makes it harder to forecast sales and earnings. In the Q4 earnings call, management noted the negative impacts of declining lumber prices on sales. Higher interest rates have mixed impacts.”
“Another challenge for investors in assessing HD is that it will be hard for 2023 results to look favorable against the backdrop of very robust earnings growth over the past three years, a period during which diluted EPS increased by 60%,” he continued.
But, despite near-term headwinds, Considine believes that the stock’s recent weakness has created an attractive buying opportunity. He said, “A full-blown recession would be bad news for HD, as people rein in discretionary spending, but interest rates comparable to current levels may serve to encourage people to improve their current homes rather than moving.”
Furthermore, he wrote, “The Wall Street consensus outlook continues to be a buy, with a consensus 12-month price target that maps to an expected 12-month total return of 14.4% over the next year.” Considine concluded, “The market-implied outlooks to mid-2023 and into the start of 2024 are both modestly bullish. While the valuation is somewhat high today, even after the sell-off following the Q4 earnings call, I'm maintaining a buy rating on HD.”
Taking an even more bullish stance, Mark Roussin, a Nobias 4-star rated author, published an article titled, “3 Foundational Dividend Stocks To Build A Portfolio Around” this week, in which he highlighted Home Depot as a potential core position for investor portfolios.
Roussin said, “The third stock I consider a MUST OWN stock is Home Depot (HD), the leading home improvement retailer with a market cap of $327 billion [the other two companies that Roussin listed in this article were Microsoft (MSFT) and Johnson and Johnson (JNJ)].” He continued, “HD also happens to be one of my favorite dividend growth stocks as they have proven to generate tons of free cash flow which has led to a fast growing dividend.”
Regarding Home Depot’s dividend growth prowess, Roussin wrote, “Over the past 5 years, the company has increased their dividend at an average of 16.4% per year. The current dividend is $7.60 per share, which equates to a dividend yield of 2.4% [since this article was published HD’s share price has fallen, resulting in a dividend yield of 2.82%]. The company has increased the dividend for 13 consecutive years and counting.”
Taking a look at the company’s all-weather business model, Roussin stated, “Home Depot is unique in the fact that they do well when the real estate sector performs well, but on the flip side they can also perform well even without the real estate sector. Reason being is that when the real estate sector, particularly the home building sector, is doing well, new home buyers have numerous items to add to their new home. When the market is poor and interest rates are high, you will see more homeowners stay in place, but maybe do the home improvement projects they had been contemplating.”
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.
And finally, regarding the stock’s valuation, Roussin said, “HD shares are trading at a forward earnings multiple of 19x, which suggests flat to 1% adjusted EPS growth in 2023. This compares favorably to the company's five year average of 21.5x and the company's 10-year average earnings multiple of 22.0x, suggesting shares of HD are undervalued.”
Overall bias of Nobias Credible Analysts and Bloggers:
The credible author community that the Nobias algorithm follows agrees with this bullish sentiment. 58% of recent articles published by credible authors have expressed a “Bullish” bias. Yet, the credible Wall Street analyst community is less enthusiastic.
Only 50% of credible analysts that the Nobias algorithm follows who have expressed an opinion on HD shares believe that they’re likely to increase in value. The average price target being applied to Home Depot by these individuals is $323.00, which implies upside potential of approximately 8.9% relative to HD’s current share price of $296.66.
Adding the stock’s 2.82% dividend yield into the equation means that we arrive at double digit total return prospects moving forward; however, it’s clear that authors and analysts alike acknowledge a slew of macro headwinds that could serve as road bumps for the stock’s growth trajectory.
Disclosure: Nicholas Ward is long HD. Nicholas Ward wrote this article for Nobias at their request with the intention 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.
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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.