The Home Depot, Inc. (HD) is scheduled to report its fourth-quarter and full-year results on February 20. Wall Street expects the company to post lower earnings and revenue over the prior-year quarter. In this piece, I have discussed why it could be wise to buy the stock now despite the expected decline in earnings and revenue.

For the fourth quarter, HD’s EPS and revenue are expected to decrease 15.9% and 3.2% year-over-year to $2.77 and $34.67 billion, respectively. The company has a stellar earnings history, having beaten the consensus EPS estimate in each of the trailing four quarters.

After the third quarter results, HD’s Chair, President and CEO Ted Decker, said, “Our quarterly performance was in line with our expectations. Similar to the second quarter, we saw continued customer engagement with smaller projects and experienced pressure in certain big-ticket, discretionary categories.”

“We remain very excited about our strategic initiatives and are committed to investing in the business to deliver the best-interconnected shopping experience, capture wallet share with the Pro, and grow our store footprint. In addition, our associates did an outstanding job delivering value and service for our customers throughout the quarter, and I would like to thank them for their dedication and hard work,” he added.

The company narrowed its guidance range for fiscal 2023. Its sales and comparable sales are expected to decline between 3% and 4% compared to fiscal 2022. In addition, its operating margin rate is forecasted to be between 14.2% and 14.1%. Also, its diluted EPS is expected to decline between 9% and 11% compared to fiscal 2022.

HD’s total retail stores at the end of the third quarter stood at 2,333, with 2,014 in the U.S. and territories, 182 in Canada, and 137 in Mexico. The company fulfilled nearly half of its online orders through stores during the third quarter, and 2023 was another record sales year for its Halloween program, both in-store and online.

The company is expected to continue this momentum into the fourth quarter with its annual holiday, Black Friday, and gift center events. Analysts expect its average sales-per-square-foot to decline more than 4%, recording a decline for the fourth consecutive quarter.

Wedbush analyst Seth Basham raised his rating on HD to Outperform from Neutral. He also raised the target price by 15%, to $380 from $330. His 2024 projections for HD’s operating margins and earnings stood at 14.3% and $15.85 per share, higher than consensus estimates of 14.2% and $15.57, respectively.

In a note to clients, Basham wrote, “We believe fundamentals are bottoming, and we expect a return to growth by 2H24 on the back of lower interest rates, improving housing trends and rising consumer confidence.” He believes that home-improvement projects will increase by at least the low-single-digit percentage range from a year ago by the second half of the year, with HD being a prime beneficiary.

HD’s stock has gained 18.3% over the past three months and 28.3% over the past nine months to close the last trading session at $362.35.

Here’s what you might want to consider ahead of its upcoming earnings release:

Disappointing Financials

HD’s net sales for the fiscal third quarter ended October 29, 2023, declined 3% year-over-year to $37.71 billion. Its gross profit decreased 3.7% over the prior-year quarter to $12.74 billion. The company’s operating income declined 12.1% year-over-year to $5.41 billion. In addition, its net earnings fell 12.2% over the prior-year quarter to $3.81 billion. Also, its EPS came in at $3.81, representing a decline of 10.1% year-over-year.

Mixed Analyst Estimates

Analysts expect HD’s EPS and revenue for fiscal 2024 to decline 9.7% and 3.1% year-over-year to $15.07 and $152.55 billion, respectively. Its EPS and revenue for fiscal 2025 are expected to increase 3.7% and 1.6% year-over-year to $15.62 and $155.05 billion, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, HD’s 24.04x is 50.8% higher than the 15.95x industry average. Its 8.97x forward non-GAAP PEG is 462.2% higher than the 1.60x industry average. Likewise, its 18.82x forward EV/EBIT is 34.6% higher than the 13.98x industry average.

High Profitability

In terms of the trailing-12-month EBIT margin, HD’s 14.51% is 93% higher than the 7.52% industry average. Likewise, its 9.57x trailing-12-month levered FCF margin is 66.7% higher than the industry average of 5.74x. Also, its 2.02x trailing-12-month asset turnover ratio is 105.6% higher than the industry average of 0.98x.

POWR Ratings Show Promise

HD has an overall B rating, equating to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. HD has a B grade for Quality, consistent with its high profitability. Its 0.98 beta justifies its B grade for Stability.

HD is ranked #22 out of 56 stocks in the Home Improvement & Goods industry. Click here to access HD’s Growth, Value, Momentum, and Sentiment ratings.

Bottom Line

While 2023 was challenging for HD due to a challenging economic backdrop and soft demand, expectations of falling mortgage rates and the Federal Reserve’s expected interest rate cuts this year are expected to raise the demand for new homes, which could drive the purchase of home improvement products.

Moreover, steep home prices and the unavailability of new homes could also lead existing homeowners to opt for remodeling and renovation services as they are relatively cheaper options than buying a new home. This could also boost demand for home improvement companies.

The company has plans to open 80 new stores in the next five years and provide an improved interconnected customer experience. HD’s plan of building its Complex Pro initiative by targeting renovators and remodelers will open up a $200 billion market for the company. Furthermore, the company expects to complete its $500 million cost-saving initiative this fiscal year.

Given its high profitability and low beta, it could be wise to buy the stock now.

How Does The Home Depot, Inc. (HD) Stack Up Against Its Peers?

While HD has an overall grade of B, equating to a Buy rating, you may also check out these other A (Strong Buy) or B (Buy)-rated stocks within the Home Improvement & Goods industry: Lifetime Brands, Inc. (LCUT), Steelcase Inc. (SCS), and Acuity Brands, Inc. (AYI). To explore more Home Improvement & Goods stocks, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

HD shares were unchanged in premarket trading Monday. Year-to-date, HD has gained 4.56%, versus a 5.09% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

More...