The housing market is not out of the woods just yet. There are hopes that the day will soon come if the Federal Reserve keeps cutting interest rates. However, an uptick in inflation could prove to be detrimental to the housing market at this point.
Home improvement stocks are one of those category of investments that follow interest rates closely through their impact on the housing market. The Home Depot, Inc. (NYSE:HD) can be called one of the largest, if not the largest, home improvement retailers in the U.S.
The stock is not exactly skyrocketing at this point. Over the past year, Home Depot’s shares have posted a modest gain of just over 5%. Over the past three months, the stock has actually declined by close to 7%. Is there a sign of bottoming?
The company’s valuation speaks otherwise. Home Depot’s price sits at 2.41x its forward sales, which is not exactly cheap when we compare it with the industry’s average.
Contrarily, the company remains a hefty cash giant, and while its gains have not been something to write home about, the stock has also not dropped significantly. So, should you hold onto Home Depot or sell it before it’s too late?
Is Fed Rate Policy Hurting Home Depot Stock?
The Federal Reserve does not directly affect housing rates exactly, but there’s a mechanism at play that affects mortgage rates. Inflationary pressures led the Fed to raise its benchmark interest rates a whopping seven times in 2022, which led to a jump in mortgage rates.
While home prices skyrocketed, home sales fell during this period. That’s because home sales don’t exactly follow interest rates. Higher rates do pressurize homebuyers, though, and sellers who experience lower demand.
So, while there is some ambiguity as to how interest rates actually affect the housing market, the impact is not seen as something positive. Overall, falling interest rates were embraced with open arms by the housing market.
Those who owned homes carried out big remodeling projects as rates fell too. So an expected recovery in the home improvement market was on the cards but the central bank has chosen to put a halt to those high hopes after holding off on future rate cuts, which could dampen spending and return the pressure on home improvement projects.
What Is the Home Improvement Giant Doing in this Backdrop?
Home Depot has a long record of being the premium home improvement retailer in the U.S. While the company has not exactly been a big grower as of late, it has deep pockets, which helps to keep a sticky shareholder base thanks to stable dividends.
The company has a history of growing dividends for 15 consecutive years, which puts it squarely In the crosshairs of income investors. The dividend payouts have also been growing at quite a pace. Over the past three years, Home Depot has grown its dividends at a CAGR of close to 11%.
In its latest earnings report, the company enacted a 2.2% increase in its quarterly dividend rate to $2.30 per share. This was also the 152nd consecutive quarterly Home Depot payout.
Management has been laser focused on growth, too. They acquired a 1.4 million-square-foot Savannah Distribution Center and more than 100 acres of adjacent land from the Savannah Economic Development Authority. The distribution center marks a crucial step in operations in the area.
Is Home Depot Stock a Sell?
Home Depot stock does appear to be a Sell according to a discounted cash flow forecast that puts fair value at $297 per share but analysts are more upbeat and have a consensus price target of $431.12 per share.
Home Depot has last reported its fourth quarterly and fiscal year results for the period ended February 2. In that announcement, management reported hotter-than-expected results. Yet, we cannot say that the results were taken overly favorably.
Most notably, Home Depot snapped a streak of eight consecutive quarters of comparable sales declines, increasing marginally in Q4. What’s notable in this is the fact that this comes at a time when consumer demand for pricier projects has been dampened by persistently-high interest rates.
The top brass posits that consumers have gotten used to the idea of high interest rates, and this will halt their ambitions to pursue big remodeling projects.
In Q4, Home Depot’s top line increased by 14% from the prior year’s period to $39.70 billion, while Wall Street analysts (surveyed by LSEG) were expecting $39.16 billion. With this sales figure, the company generated earnings per share of $3.02 on an unadjusted basis, increasing by just over 7% and topping the Wall Street analyst estimate of $3.01 per share.
For the current year, the company expects slower growth than is currently present, projecting a 2.8% growth in its top line, while its comparable sales position is supposed to get marginally better to the tune of 1% from the prior year.
Home Depot’s prospects remain somewhat tepid, and it has long blamed the economic backdrop for its woes. While the company might be an attractive bet for income-seeking investors, it might be better to just watch it for now.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
