While the most recent economic print delivered encouraging data on key metrics such as inflation, investors are nevertheless concerned about the prospects of a recession. Frankly, it’s a non-zero-probability event, which subsequently bolsters the case for home improvement retail specialist Home Depot (NYSE:HD). It’s not exciting in the least. However, when investors face doubt, they can ride out the storm, thanks to its predictable business. I am bullish on HD stock due to its proven track record.
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HD Stock Plays the Role of Old Faithful
Although hardly anybody would mistake Home Depot as a riveting must-have trade, the stock remains relevant. Amid the hype of the latest innovations in technology, the company serves basic needs that never change: walls that need repainting, pipes that need resealing, and so on. Recently, its relevance again took the spotlight with the disclosure of its Q3-2023 earnings report.
According to TipRanks reporter Shrilekha Pethe, Home Depot reported diluted earnings per share of $3.81, which admittedly slipped below the EPS of $4.24 during the same quarter last year. However, the latest result beat analysts’ consensus estimate of $3.75. On the top line, the retailer’s sales declined by 3% year-over-year to $37.7 billion. Still, it exceeded the consensus view of $37.6 billion.
Management brought up some interesting points — some good, some not so great. Home Depot Chair, President, and CEO Ted Decker remarked that its quarterly performance landed in line with the company’s expectations. On the positive side, Decker witnessed continued customer engagement with smaller projects. However, the head executive admitted incurring pressure “in certain big-ticket, discretionary categories.”
As a result, Home Depot responded with a narrower guidance for Fiscal Year 2023, expecting sales and comparable sales to decrease between 3% and 4% on a year-over-year basis. In addition, the leadership team sees diluted earnings declining by 9% to 11% compared to the prior year.
At first, some of the commentary might seem discouraging for HD stock. However, the decline in the discretionary categories is not exclusive to Home Depot. More importantly, the underlying home improvement sector isn’t discretionary in the least: when something breaks, you need to fix it (or pay someone else to fix it).
Simple Logic May be a Hidden Catalyst for Home Depot
As to the last point above, the main reason why investors appreciate HD stock is its underlying predictability. In many ways, Home Depot enjoys a captive audience. With Murphy’s Law (meaning anything that can go wrong will go wrong) practically guaranteed to visit misfortunate souls every day across the country, demand might not skyrocket but it will likely stay consistent. However, the company may also benefit from a hidden catalyst.
According to real estate industry data, roughly half of buyers during approximately the first two years of the COVID-19 pandemic bought a home sight unseen. Other data points show that home sellers, incentivized by the spike in equity and the surge in demand, renovated their properties to boost the price. Still, it’s also very possible that a good many sellers sold less-than-ideal homes given the unprecedented bullish cycle.
If so, even with the latest reports projecting a decline in home renovation spending in 2024, demand for home repair projects could help pick up the slack. It’s speculative, but the argument follows a logical pathway. After all, one of the biggest risks in buying a home sight unseen – especially involving waived contingencies – is the possibility of hidden repair bills materializing.
Of course, such bills would be bad news for homebuyers. However, for stakeholders of HD stock, that could translate to a steadily rising share price.
Pricing Power in the Numbers
Finally, confirmation of the patient, long-term bullish argument for HD stock centers on its gross profit margin. Since the beginning of January 2019, the company’s gross margin has been relatively consistent at nearly 34%. During this period, the highest this stat jumped to was 34.48%. In the most recent quarter, it clocked in at 33.78%.
Interestingly, even with Home Depot’s numerous strengths, the stock looks undervalued. Right now, the price-earnings ratio for the home improvement retail sector comes in at 21.1x. At the same time, HD stock trades at 19.7x trailing earnings. What more could you ask for from a steady investment idea?
Is HD Stock a Buy, According to Analysts?
Turning to Wall Street, HD stock has a Moderate Buy consensus rating based on 16 Buys, nine Holds, and one Sell rating. The average HD stock price target is $331.84, implying 8.7% upside potential.
The Takeaway: HD Stock Gets the Job Done
While many investments this year depended heavily on pizzazz, Home Depot went the opposite approach, instead offering the benefit of longstanding relevance and an almost-bulletproof business model. It’s getting the job done, and outside fundamentals suggest better prospects ahead for HD stock.
