On Wednesday, HSBC issued a downgrade for Home Depot (NYSE:HD) stock, shifting its rating from Hold to Reduce. The firm also set a new price target of $323.00 for the home improvement retailer's shares. The downgrade comes amid concerns about rising operating costs outpacing sales growth, which could squeeze profit margins.
HSBC's analyst noted that the inflation in operating costs is escalating quicker than Home Depot's sales, creating a pinch on the company's margins and overall profitability. This observation led to a downward revision of the forecasted earnings per share (EPS) for the fiscal years 2025 and 2026 to $15.10 and $16.33, down from previous estimates of $15.98 and $16.91, respectively.
Home Depot's stock currently trades at a forward price-to-earnings (PE) ratio of 24 times for FY2025, which the analyst pointed out is a 10% premium compared to its 10-year average. This valuation is considered high given the immediate challenges and earnings projections the company faces.
The target price of $323.00 is derived from a PE multiple of 21.3 times, which is a reduction from the prior multiple of 20.2 times. This new target PE is below Home Depot's historical 10-year average. It is based on the adjusted FY2025 earnings estimate of $15.10 and suggests a potential downside of 10.9% from the stock's current price level.
The analyst concluded that due to the absence of near-term positive drivers for the stock, a downgrade to Reduce was warranted. However, they also identified a key risk to their outlook: consumer spending on housing projects could surpass expectations, which would positively impact Home Depot's financial performance.
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