On Wednesday, Evercore ISI adjusted its outlook on Home Depot (NYSE:HD), reducing the stock's price target to $400 from $415, while continuing to endorse the stock with an Outperform rating.
The firm's analysis highlighted the concern over Home Depot's negative comparable store traffic, which has persisted for 13 consecutive quarters, drawing a parallel to the 16-quarter stretch observed during the Global Financial Crisis that began in 2006. Despite the prolonged period of decline since the COVID-19 pandemic and subsequent economic stimulus, the impact has not been as severe.
Home Depot's strategic shift toward the growing professional (Pro) segment was noted as a positive move. The company's investment in technology and services is aimed at increasing market share in anticipation of an economic recovery.
There are concerns about potential risks, such as lower margins or return on invested capital in the Pro segment, and the lack of synergies with the core do-it-yourself (DIY) market. The acquisition of SRS, valued at 16 times EBITDA, is expected to prevent Home Depot from buying back its stock for up to two years.
The analyst's position aligns with a more optimistic view, citing Home Depot's historical strength in capital allocation and its unique position to leverage operational scale and expertise in a Pro market that is primed for consolidation. Despite the waiting period for a market turnaround, the firm sees a favorable risk/reward opportunity for Home Depot.
The new price target is based on the expectation that Home Depot's stock will return to a 25% premium over the market based on the 2025 earnings estimate, which does not assume a peak in earnings or profit, leaving room for potential upside.
In other recent news, Home Depot reported a slight increase in its second-quarter sales for fiscal 2024, reaching $43.2 billion, a 0.6% rise from the previous year's quarter. However, the company did experience a 3.3% decline in comparable sales, with U.S. stores seeing a 3.6% drop.
Adjusted diluted earnings per share were reported at $4.67, surpassing both Telsey Advisory Group's estimate of $4.64 and the FactSet consensus of $4.53. Despite this, Home Depot's sales saw a decline of 2.4% to $41.9 billion, excluding the impact of the recent acquisition of SRS Distribution.
Telsey Advisory Group maintained its Market Perform rating on Home Depot stock, while Wolfe Research adjusted its price target for Home Depot shares, reducing it to $392 from the previous $401. Both firms noted challenges in the home improvement sector due to factors such as higher interest rates and economic uncertainty.
In other developments, Home Depot and other major companies have preemptively imported goods to mitigate potential cargo delays due to a possible strike at key seaports in October. The company has also revised its full-year guidance, expecting a decrease in comparable store sales of between 4% and 3%, and an adjusted EPS decrease of 1%-3%.
InvestingPro Insights
In light of Evercore ISI's recent adjustment to Home Depot's price target, it's worth noting some key financial metrics and insights from InvestingPro that could provide additional context for investors. Home Depot has demonstrated a consistent commitment to shareholder returns, having raised its dividend for 14 consecutive years, and maintained dividend payments for 38 consecutive years, signaling a strong track record of financial stability and investor confidence. This is particularly relevant as investors consider the company's ability to sustain dividend growth amidst strategic shifts and market fluctuations. Furthermore, Home Depot's market capitalization stands at a robust $347.13 billion, with a Price/Earnings (P/E) ratio of 23.07, reflecting its standing as a heavyweight in the Specialty Retail industry.
Additionally, while 15 analysts have revised their earnings downwards for the upcoming period, it's important to highlight that Home Depot is still expected to be profitable this year, with a reported gross profit margin of 33.48% over the last twelve months as of Q1 2023. This profitability, coupled with a high return over the last decade, suggests that the company has navigated market challenges effectively in the past. InvestingPro also lists several more tips that could provide further insights into Home Depot's performance and outlook. For investors seeking a deeper analysis, additional tips are available on the InvestingPro platform.
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