Image Source: Mike Mozart
By Brian Nelson, CFA
On November 14, Home Depot (HD) reported third-quarter results for the period ending October 29, 2023, that were largely in-line with expectations. Though the housing market remains stagnant due to increased mortgage rates and limited supply, Home Depot continues to navigate the market well, in our view. The firm’s comparable store sales faced pressure in its fiscal third quarter, and while big-ticket, discretionary purchases may be experiencing some pressure, management noted that it continues to see strong activity with customers pursuing smaller projects. We like Home Depot as a derivative play on the housing market, and the high end of our fair value estimate stands at $344 per share.
When Visa (V) reported its calendar third-quarter results a few weeks ago, it showed that consumer spending remains resilient, and we think easing of inflationary trends, particularly with at-home food costs and with prices at the pump, offers considerable support to the general home improvement market, among other areas. Many consumers still view their homes as crucial long-term investments where they can build equity and wealth over time, and the strength in housing prices the past few years have supported such a view. We think the lasting impact of the COVID-19 pandemic on consumers’ minds will continue to stimulate above-average remodeling demand for larger at-home working and living quarters, a positive dynamic offset in part by organized retail crime, which remains a retail sector-wide problem.
Hybrid working environments and work-from-home [WFH] trends are not going away, in our view, and while such dynamics will have serious implications on office REITs (VNQ), we think WFH trends will be a boon for the home improvement retail sector in the coming years. Looking ahead to the remainder of fiscal 2023, Home Depot expects comparable store sales to face similar declines as that experienced during the fiscal third quarter, while diluted earnings per share is expected to fall 9%-11% this fiscal year compared to last year. Though Home Depot is not growing during the current housing market malaise, results are still holding up well, and we like the long-term trends working in favor of the home improvement retailers, more generally, Lowe’s (LOW) included.
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, RSP, QQQ, and SCHG. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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