Mega Dealer Home storage (hd 0.86%) it is down about 24% from its post-pandemic peak. The home improvement boom of 2020 and 2021 sent the stock soaring, but now the slowdown in the housing market and the impact of inflation on consumer spending are worrying investors.
With potential economic challenges on the horizon, investors are rightly asking whether or not now is a good time to buy Home Depot stock. Let’s take a closer look to see.
Built to last
Home Depot is the largest home improvement retailer in the world, with more than 2,300 stores in all 50 states along with Canada, Mexico and three US territories. A cold housing market is not ideal for a business that has direct ties to the real estate industry. But it’s also not as big a cause for concern as many investors believe.
The Home Depot has been around for over 40 years and has seen its fair share of slow housing markets, the most recent being the Great Recession. The housing market was in shambles as millions of homes were foreclosed and nearly one in four homeowners were underwater.
It’s been a tough time for Home Depot, but the company has shown great resilience. From 2007 to 2009, what was considered the peak of the recession, Home Depot’s stock price fell 5% while the broader S&P 500 it decreased by more than 25% in the same period. And the current housing market conditions are nowhere near as bad today.
The company is now facing other economic challenges, including decades of high inflation and ongoing supply chain problems, but its latest earnings show the company is still going strong. In the third quarter of 2022, Home Depot revenues grew 5.6% year over year, while diluted earnings per share increased 8.2%. Its operating margin also increased slightly, a sign that the company is managing higher costs related to supply chain issues and inflation, while continuing to grow sales.
Professional traders and do-it-yourself renters or homeowners are no longer his primary clients. The company has a large selection of products that it offers things like home appliances, holiday decorations, gardening, and storage or organization solutions, allowing it to appeal to a diverse range of customers in any season.
Its latest Halloween event produced record sales in its home decor department, and the company is optimistic about the upcoming holiday season. The company is continuing its gift program, which places some products in gift packages that have proven lucrative in the past.
It is also improving its services and offers for its Pro members, who are mostly professional traders. With the Pro program accounting for more than half of its revenues, enhancing the experience and offerings for this category can help sustain the company’s growth in the coming quarters.
Home Depot is also in a good financial position. Even if conditions deteriorate further, it has enough cash to meet its debt and dividend obligations for the foreseeable future and is generating approximately $10 billion in free cash flow. The company is currently trading about 2x its sales, which is low for its historical selling price range over the past five years. Additionally, its price-to-earnings ratio is around 19, which is just below the average stock within the S&P 500.
Being down 24% this year definitely means this high-quality stock is for sale compared to recent prices. Long-term investors looking for reliability and a slightly above-average 1.8% dividend yield could benefit from investing in Home Depot today.
Liz Brumer-Smith holds no positions in any of the stocks mentioned. The Motley Fool has locations and recommends Home Depot. The Motley Fool has a disclosure policy.