Case Study: Home Depot (HD) stock according to high performing analysts
Key Points
Performance
Home Depot shares rose by 0.58% this week, pushing their year-to-date losses down to -7.92%. This compares poorly to the S&P 500, which is up by 9.62% on a year-to-date basis.
Event & Impact
Home Depot posted its first quarter results this week, beating consensus estimates on the bottom-line, but missing them on the top-line. During Q1, HD’s revenue totaled $37.3 billion, missing Wall Street’s consensus estimate by $1.05 billion. Home Depot’s Q1 GAAP earnings-per-share came in at $3.82, which was $0.03/share above consensus estimates.
Noteworthy News:
The biggest news coming out of HD’s Q1 report was updated guidance calling for negative sales growth for the full year. If that occurs, it will be the first time that HD has posted negative y/y sales results since 2009. The company highlighted unique headwinds, such as weather, that are hurting its spring sales events. But, on top of that, rising interest rates and a slowing economy and housing market are making it difficult for this retailer to find growth.
Nobias Insights
56% of recent articles published by credible authors focused on HD shares offer a “bullish” bias. Two out of the three credible Wall Street analysts covering HD believe that shares are likely to rise in value. The average price target applied to Home Depot by these analysts is $330.67, which implies upside potential of approximately 13.7% relative to the stock’s current share price of $290.88.
Bullish Take Howard Smith, a Nobias 4-star rated author, said, “Home Depot caters to both residential homeowners and professional contractors, helping to balance its business. But it can't avoid being affected by less housing demand or an economic slowdown when those events occur. That is likely to be a near-term issue, however. Investors who pushed the stock off of its morning lows were looking long term, which makes sense based on the past success of the company,”
Bearish Take Marianne Wilson, a Nobias 4-star rated author, stated, “The home improvement giant missed Wall Street estimates for the second consecutive quarter as consumers pulled back on big-ticket home improvement spending after the pandemic-fueled spending spree of the past few years. Cold weather and falling lumber prices also hurt sales.”
HD May 2023
Home Depot (HD) reported its first quarter earnings this week, spooking Wall Street with projections for its first annual negative revenue growth result since the Great Recession. Initially, after posting its results, HD shares fell approximately 5%. However, throughout the remainder of the week, the bounce returned, ultimately closing the week up by 0.58%. However, on a year-to-date basis, Home Depot has been a major underperformer, posting a share price movement of -7.92%.
For comparison’s sake, so far in 2023, the S&P 500 is up by 9.62%. Over the last decade, HD has been a major outperformer, up 273.7% compared to the S&P 500’s 151.9% gains.
And looking at the opinions expressed by the authors and analysts that Nobias tracks, it appears that the majority of credible individuals who follow this company believe that it has what it takes to regain its positive trajectory.
Bearish Nobias Credible Analysts’ Opinions:
Ahmed Farhath, a Nobias 4-star rated author, broke down the expectations for Home Depot’s quarters results coming into its first quarter report in an article published at Seeking Alpha this week, prior to the stock’s earnings date.
Farhath highlighted the company’s most recent results, which were mixed. “The company on Feb. 21 reported Q4 GAAP EPS of $3.30 beating estimates by $0.02. Revenue of $35.83B missed expectations by $170M,” he said.
Regarding the upcoming Q1 results, Farhath said, “The consensus EPS estimate is $3.81 and the consensus revenue estimate is $38.35B.” He continued, “Over the last 3 months, EPS estimates have seen 1 upward revision and 18 downward revisions. Revenue estimates have seen 2 upward revisions and 15 downward revisions.”
Despite this poor sentiment, historical data on Seeking Alpha shows that Home Depot has established a clear history of exceeding Wall Street’s expectations. According to Seeking Alpha’s data, Home Depot has beaten Wall Street’s consensus EPS estimates during 19 out of the last 20 quarters. This company has beaten Wall Street’s consensus revenue estimates during 15 out of the last 20 quarters.
Marianne Wilson, a Nobias 4-star rated author, published a post-earnings recap of Home Depots Q1 results at Chain Store Age this week. She provided a broad overview of the results, stating, “The home improvement giant missed Wall Street estimates for the second consecutive quarter as consumers pulled back on big-ticket home improvement spending after the pandemic-fueled spending spree of the past few years. Cold weather and falling lumber prices also hurt sales.”
Looking at the company’s top-line, Wilson said, “Revenue fell 4.2% to $37.26 billion, missing estimates of $38.28 billion. Comparable sales decreased 4.5%, with U.S. comps falling 4.6%. Lumber deflation accounted for more than 2 percentage points of the decrease.”
Focusing on profits, Wilson added, “The company reported net income of $3.87 billion, or $3.82 per share, for the first quarter (ended April 30), down 8.5% from $4.23 billion, or $4.09 per share, in the year-ago period. Analysts had expected earnings of $3.80 per share.”
Regarding forward guidance, Wilson wrote, “Home Depot said it now expects sales and comparable sales to decline between 2% and 5% for the fiscal year compared to its previous forecast of roughly flat sales for the period. Its operating margin rate is expected to come in lower for the year, in a range of between 14% and 14.3% compared with a previously expected 14.5%, which includes the impact of the $1 billion investment in employee wages it announced in February.”
Michelle Chapman, a Nobias 5-star rated author, also covered HD’s Q1 results, putting a spotlight on some of the operational headwinds that the company is facing in the market today in her article published at the Charleston Post and Courier this week.
Chapman began her piece by stating, “After years of explosive growth during the pandemic, Home Depot’s revenue during the first quarter fell short of expectations, and the company cut its profit and sales outlook for the year, sending shares lower at the opening bell.”
Highlighting the rarity of this event, Chapman noted, “Home Depot on Tuesday projected its first decline in annual revenue since 2009 in the aftermath of the bursting of the housing bubble and financial crisis.” She quoted Home Depot’s CEO, Ted Decker, who said, “After a three-year period of unprecedented growth for our sector, during which we grew sales by over $47 billion, we expected that fiscal 2023 would be a year of moderation for the home improvement market.” “Decker said weak sales were mostly due to lumber deflation and bad weather, particularly in its Western division, which had to contend with extreme weather in California.
Chapman also said that macroeconomic headwinds are at play. “The U.S. Federal Reserve has hiked benchmark interest rates 10 consecutive times with hopes of slowing the economy and cooling inflation,” she wrote.
And, as Chapman notes, these higher rates are starting to be seen in the broader economic growth metrics. “The U.S. economy slowed sharply from January through March, decelerating to just a 1.1% annual pace as higher interest rates hammered the housing market and businesses reduced their inventories,” she said. This is why, she concludes, HD’s guidance continues to fall.
Bullish Nobias Credible Analysts Opinions:
Howard Smith, a Nobias 4-star rated author, offered a bullish takeaway from his post-earnings report on HD published at the Motley Fool this week. Smith noted the stock’s weakness and the relatively poor guidance; however, he believes that the stock’s headwinds will prove to be transitory. “Home Depot caters to both residential homeowners and professional contractors, helping to balance its business. But it can't avoid being affected by less housing demand or an economic slowdown when those events occur. That is likely to be a near-term issue, however. Investors who pushed the stock off of its morning lows were looking long term, which makes sense based on the past success of the company,” he said.
Furthermore, he noted that the company’s management team appears to agree with this bullish sentiment by highlighting the stock’s shareholder returns.
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.
Smith wrote, “The company beat earnings per share (EPS) expectations, aided by Home Depot's ongoing share repurchase plan. Reducing share count increased per-share earnings, and the company bought back $2.9 billion of its stock in the quarterly period ended April 30.”
Overall bias of Nobias Credible Analysts and Bloggers:
Overall, 56% of recent articles published on HD shares by credible authors that the Nobias algorithm tracks have expressed a “bullish” bias towards shares. The credible Wall Street analyst community that Nobias tracks agrees with this sentiment.
Two out of the three credible analysts who have provided opinions on HD shares believe that they’re likely to rise in value. For instance, Brial Nagel, a Nobias 5-star rated analyst, updated his price target after examining the Q1 results and is still calling for double digit upside potential.
According to the Fly on the Wall: “Oppenheimer analyst Brian Nagel lowered the firm's price target on Home Depot to $360 from $400 and keeps an Outperform rating on the shares. The company's weaker than planned recent results offered a number of "notable intermediate, longer-term positives," including prospects for sales trends to re-solidify, as weather and lumber price dislocations abate, and "even more subdued" guidance and Street forecasts," the analyst tells investors in a research note. The firm believes any fundamental weakness nearer term should prove short-lived, and give way to a return to Home Depot's "historical healthy sales, and profit expansion algorithms."’
Currently, the average price target being applied to HD shares by the credible analyst community that Nobias tracks is $330.67. Compared to HD’s share price of $290.88 that represents upside potential of approximately 13.7%.
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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