Home Depot Is Heading For The Bargain Basement, Be Ready

Key Points

• Home Depot is moving lower after weak guidance that may be too optimistic for 2023. 
• Cash flow remains strong and the dividend safe. 
• Price action is heading lower, but a buying opportunity is in the making. 

Home Depot NYSE: HD is a good company with an outstanding stock, but now is not the time to buy. The company’s Q4 results and guidance for 2023 have the stock headed for the bargain basement, which is good news but not news that should be acted on now.

Once the stock is at the bottom, investors can start scooping up shares to prepare for the subsequent recovery. Of course, when that recovery begins is up to the Fed, the economy, and inflation, but investors should not be complacent. Home Depot will hit bottom, and when it does, it won’t likely stay there for long. Until then, it’s time to wait, build capital, and prepare for the signals. 

So, what’s wrong with Home Depot now? The Q4 results were OK enough, but the guidance is weak. The takeaway from the total information is that higher prices, which have been sufficient to sustain growth in the face of flagging volume sales, will not be enough in 2023.

Add in the fact that earnings trends are in decline for 2023, that inflation is still high, and the FOMC is still raising rates, and the odds are high, the weak guidance is optimistic. Regardless, it’s not a matter the market wants to bet on, and that is being priced into the stock.

Home Depot was trading at 19X its earnings which isn’t astronomically high, but it is a few handles above the broad market average, and there isn’t much to keep it there right now. 

Home Depot Plunges On Weak Guidance 

Home Depot had a decent quarter, but it was not an inspiring quarter. The $35.83 billion in net revenue is up 0.3% versus last year, but this is weaker than expected, and the internals is not promising. Systemwide and US comps fell -0.3% and were offset by new stores. Ticket counts increased due to frequent shopping, but transaction averages fell more to offset the strength. 

The margin held up at the gross and operating levels, but some contraction occurred. The gross margin improved by eight bps but was offset by a 25 bp decline at the operational level. Despite the small top-line growth, the net income was flat on a YOY basis.

The GAAP EPS is the best news in the report. It came in at $3.30, up 2.8% versus last year and $0.02 ahead of the consensus, but this is due to share repurchases and not operational strength. 

The guidance is equally good from the long-term investment standpoint but does little to support share price now. The company expects systemwide and comp sales to be flat in 2023 and produce a mid-single-digit decline in EPS.

The EPS decline includes a planned $1 billion investment in front-line hourly wages, which good news for employees, but this is just another inflationary impact to weigh on the results and stock price in 2023. 

Home Depot Sweetens The Pot With Dividend Increase 

Home Depot pays a nice dividend that just got a little nicer. The company issued a 10% distribution increase with a stock yield of around 2.5% and share prices heading lower. This is attractive compared to the broad market average near 1.5% but comes at a slightly higher valuation. Lowe’s Companies NYSE: LOW trades at a more attractive 15X earnings, in line with the broad market, but its yield is less attractive near 2.0%. 

Shares of HD stock are down more than 5.0% following the earnings release and will likely move lower. The stock may find support at the mid-point of the trading range, near $300, but investors should wait for a clear signal to buy. If no signal emerges, a move below the $300 level could get this market down to $260, consistent with pre-pandemic trends.