With shares down almost 25% compared to the 14% loss in the S&P 500 over the same time period, Home Depot (HD 0.20%) stock is currently much cheaper than it was in early 2022. Investors’ concerns about the stock expanded to include a probable recession and dismal customer traffic trends.
However, those are only short-term issues, and Home Depot has already prospered through numerous similar slowdowns. Let’s examine whether the stock for this home improvement retailer is a decent investment right now in light of its track record.
Various development outcomes
In the fiscal year 2022, Home Depot made the best of a poor situation. After several years of rapid expansion, demand for home renovation products changed, and prices rose at the same time. Nevertheless, comparable-store sales increased by 3% in 2018 after increasing by 11% in 2021.
However, the company was showing indications of stress. Only an increase in average spending of 9% was enough to make up for a 5% decline in customer traffic in the year ended in late January. Home Depot showed price strength in a market with challenging demand. It also outperformed rival Lowe’s (LOW 0.17%) because of the greater presence of skilled contractors. These criteria imply that the market leader maintains a valued position that will endure any prospective slump.
Cash flow and profitability
The financial stability of Home Depot is also impressive. Wall Street is aware of the retailer’s exceptional efficiency because its operating profit margin is close to 15% of sales as opposed to Lowe’s 11%. The management group is excellent at allocating capital. Home Depot’s return on invested capital, which often exceeds 40%, is evidence of this.
This indicator is improved by the company’s stock repurchase spending. Additionally, their expenditures increase shareholder returns. For instance, Home Depot’s earnings per share increased by 7.4% in 2022 despite just a 4.1% increase in net earnings.
Perspective and value
Investors who purchase the stock today must be patient. The management of Home Depot anticipates unchanged comps and a modest decline in profits in 2023. Even with high demand from professional contractors, ongoing client traffic decreases will be difficult to reverse.
However, nothing about that flimsy scenario endangers the broader investment premise. Home Depot continues to expand its market share in a sizable sector that it currently controls. Stock repurchases and a dividend that was increased by 10% this past year after being raised by 15% the year before help to boost shareholder returns. Extending the e-commerce platform and providing more services to professionals and DIY customers are other appealing growth objectives.
When Home Depot was valued at more than three times its yearly sales in the early years of 2022, investors may have paid too much for all that potential. However, given that the stock’s P/S ratio is currently little under 2 times revenue, it is more difficult to argue that it is overvalued.
Yes, even if the American economy manages to avoid a recession, Home Depot is probably going to have a weaker 2023. But as it has for the majority of the prior ones, business should guide the sector out of the upcoming cyclical slowdown. Investors will be delighted they just kept the shares in their portfolio up until then if they decide to purchase the stock.