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Stock Analyst Update

Home Depot Q3 Earnings Better Than Anticipated, but Long-Term Outlook Remains Unchanged

Stock’s fair value estimate of $267 expected to be increased, shares still overvalued.

Home Depot Stock at a Glance

  • Current Morningstar Fair Value Estimate: $267
  • Home Depot Stock Star Rating: 2 Stars
  • Economic Moat Rating: Wide
  • Moat Trend Rating: Stable

Home Depot Earnings Update

After digesting third-quarter results from Home Depot that were better than anticipated, we plan to bump our $267 fair value estimate up by a low-single-digit percentage. However, the shares still appear overvalued, and we suggest waiting for a better entry point to invest.

In the third quarter, sales advanced 5.6% to $38.9 billion, aided by an 8.8% uptick in average ticket, partially offset by a 4.3% drop in transaction count. Although management’s qualitative commentary suggested some signs of deceleration in certain product categories, we view softening demand as a natural progression toward a more normalized mid-single-digit sales growth run rate. Still, when juxtaposed with 2019 levels, transaction count and average ticket are up 2% and 35%, respectively. Moreover, 10.1% growth in big tickets (above $1,000) strikes us as encouraging, as it evidences a healthy pro backlog and demand for large projects. In our view, this momentum reflects the various investments funneled into that business (supply chain, loyalty program, and digital experience, to name a few). While these efforts could limit near-term expense leverage upside, we view them as prudent investments for Home Depot to gain share in the $900 billion North American home improvement market.

Even with diverse investments underway, operating margin clocked in at 15.8% in the quarter, up 10 basis points. We think this is a result of Home Depot’s agile execution strategies coupled with its ability to absorb costs owing to its extensive scale and footprint, which underpins our wide moat rating.

Management reaffirmed its fiscal 2023 guidance of 3% comparable growth, 15.4% operating margin, and mid-single-digit diluted EPS growth, in line with our near-term forecast. We remain optimistic about long-term secular demand tailwinds such as housing price appreciation and aging housing stock, and we continue to forecast Home Depot to achieve 4% average top-line growth and a 15.7% operating margin by 2031.