Home Depot Earnings: Prudently Navigating Macro Pressures With Strategic Execution, but Shares Rich

Wide-moat Home Depot’s tepid fourth-quarter results reflect macro pressures that include slow housing turnover and elevated mortgage rates. Net sales dropped 2.9% to $34.8 billion, and diluted earnings per share came in at $2.82, largely in line with our forecast. The top-line decline was a byproduct of weaker customer transactions and average ticket, which contracted by 1.7% and 1.3%, respectively. Big-ticket purchases (over $1,000) were especially slow, declining 6.9%. The firm expects housing headwinds will persist, leading to 1% declines in both comparable sales and EPS (excluding the 53rd week) in fiscal 2024. We intend to lower our 2024 growth forecasts of 2% for sales and 7% for EPS but don’t plan any material change to our long-term outlook or our $263 fair value estimate. As such, we continue to view the shares as overvalued, trading at a 28% premium to our existing intrinsic valuation, and consider their recent surge (nearly 20% over the past three months) as overdone. We believe the current share price implies expectations that far exceed our forecast for 4% annual sales growth beyond fiscal 2024 and nearly 16% operating margins, which considers the mature phase of the industry’s growth cycle.