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Market Insights

Will slowing housing markets drag on Home Depot?

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Stock Of The Week: Home Depot

Will slowing housing markets grag on Home Depot?

Home Depot. The multinational giant of home improvements, tools, building materials and a paradise for DIY enthusiasts. It might seem like a lifetime ago now, but Home Depot was one of the companies that seemed to benefit most from the Covid lockdowns.

People were stuck at home. All those odd jobs they’d been putting off for years were staring them in the face, and they finally had that most valuable, yet often scarce commodity. Time.

The pandemic DIY boom sent shares in the company soaring, with the earnings per share (EPS) metric initially peaking at $4.02 in Q2 2020. The performance since has been pretty respectable, albeit erratic with quarterly EPS fluctuating between $2.65 in Q4 2020 and $4.53 in Q2 2021.

The share price has recovered from the lows, and is now testing resistance from below. The 200 day moving average isn’t too far away either…

Home Depot

Q1 2022 was better than expected. Earnings per share were $4.09, up from $3.86 a year earlier. Analysts had expected earnings of $3.69 a share.

CEO Ted Decker was delighted, saying:

“the solid performance in the quarter is even more impressive as we were comparing against last year’s historic growth and faced a slower start to spring this year”

However, it remains to be seen if this solid performance can continue. As housing markets across the US & Canada continue to slow, how robust will the demand for home improvement be?

A couple of large components of home improvement demand is in dressing a property up for sale and reforming a newly-purchased property. And who doesn’t like to ‘put their own stamp’ on a property they’ve just purchased to make it their own?

It’s not only a matter of choice though. In the white-hot pandemic housing market, many buyers waived the usual due-diligence and checks to get ahead of the pack and ensure their bid was accepted. Could there be some issues hiding under the floorboards?

And of course, home improvement isn’t solely driven by the cycle of the housing market, especially in the ‘new normal’ when working from home has become far more usual and accepted.

Likewise, there’s another side to the property market argument. As much of the slowdown has been attributed to the increase in mortgage rates, this could incentivise people to stay put, ride out the storm, and improve their existing homes rather than looking to trade up and pay a higher mortgage rate.

For Home Depot, it doesn’t really matter what the customers’ motivations are. As long as they’re still making improvements, they’re still buying. Perhaps then, the bigger risk is a downturn in consumer spending altogether.

There’s been plenty of talk of a squeezed consumer, but companies haven’t reported a huge squeeze on profits from slowing consumer demand this earnings season. Quite the opposite, consumer spending has held up far better than expected.

Home Depot is set to report earnings before the open on the 16th of August. Investors will be keenly looking for this upturn to continue and are set to zero in on the company guidance, both from the consumer perspective and the profitability view. Many raw material and input costs have fallen back from the peaks, which could relieve concerns about profit margins coming under pressure.

Not investment advice. Past performance does not guarantee or predict future performance.

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