Is Home Depot Stock Overvalued? When the coronavirus pandemic caused global shutdowns, Home Depot Inc (NYSE:HD) won as people focused on their DIY projects at home.
From gardening to remodeling, working and going to school from home drove the company over a $300 billion market cap. This historic high has some investors wondering – is Home Depot stock overvalued?
Home improvement may be a trend, but there’s plenty of competition, most notably from rival Lowe’s (NYSE:LOW). Although Home Depot is the (barely) bigger of the two, it may lose some of its lead.
However, it’s aggressively spending on leading digital initiatives in retail. It has a large footprint across North America, and it’s using the pandemic to continue expanding.
Let’s dive into Home Depot to determine whether it can justify its valuation.
Why Home Depot Stock Went Up
Shelter in place orders around the country had customers rushing to stock up on essentials, and it turns out that included everything Home Depot carries.
From lumber to build things to gardening supplies, tools, and more, the store became the place for every type of builder. Even professional contractors use the store, which has its own in-store finance options, free Wi-Fi, and more.
Strong earnings reports and steady dividend payouts that beat retailers like Costco, Walmart, and Target sparked a bull rush on Home Depot stock in the aftermath of the coronavirus pandemic. Its financials are the best place to see why analysts turned so bullish.
Home Depot Financials
Home Depot has nearly 2,300 stores spread across the United States, Canada, and Mexico. Its most recently reported quarterly sales were $38 billion in the second quarter of 2020.
When governors around the country issued “stay at home” orders, people rushed to Home Depot in droves to buy everything they needed for their home renovation projects.
The company earned $108.2 billion in 2019, compared to $88.52 billion in 2016. Its cost of goods sold in 2019 was $72.91 billion and it’s continually increasing growth spending, which is nearly at $20 billion in 2020.
Its consolidated net income in 2019 was $11.12 billion, up from $7.01 billion in 2016.
The U.S. Census Bureau reports home improvement retail grew 4.4 percent at a time when general retail and food service is down 4.3 percent.
Home Depot is outperforming even its sector with 7.3 percent growth during this period. It accomplished this with a forward-thinking business initiative called One Home Depot.
The overall point is to create an omnichannel experience that’s consistent online, in-store, or when using any of the company’s services.
It’s also heavily invested on distribution infrastructure, which helps it outperform the competition when it comes to restocking and delivery. This gives it a strong foothold in the sector.
Is Home Depot Valuation Too High?
HD is trading in the $250-300 range in the last half of 2020, with a market cap of around $300 billion.
This may seem high, but it’s only three times company earnings and practically a bargain when compared to high-priced stocks like Uber and Tesla that are barely profitable.
The company even raised its quarterly cash dividends payments to $1.50 per share, for a total of $6 for the year.
Stores run by Home Depot are already equipped for the future – they were among the first to accept PayPal, contactless payments, already have a customer loading area built in, and more.
The only real questions remaining are whether Lowes (or to a lesser extent, Amazon, Ace Hardware, or a new competitor) can disrupt the home improvement industry to the point that Home Depot has to fight to maintain its model.
This may sound impossible, but Walmart destroyed most of traditional retail at the end of the 20th Century, and the 21st Century has been dominated by ecommerce giants like Amazon, eBay, and Alibaba. There’s also the turbulent 2021 market to consider.
Will Home Depot Stock Drop?
Americans are facing an unprecedented housing crisis in 2021 as soon as government stimulus programs end. Paycheck Protection Program loans are depleted, Pandemic Unemployment Insurance runs out in December (although the bulk of the payments ran out in July), and all state and federal housing assistance programs (such as rental and foreclosure moratoriums) will expire.
It’s unclear exactly how this will affect Home Depot’s business. It could deflate with the rest of the market if construction halts and people are unable to afford home upgrades or anything but the most necessary of repairs.
This could cause problems for Home Depot, but it’s also the biggest of its niche, and you’re more likely to see a company like Sherwin-Williams suffer from these problems first.
Home Depot’s stock price could drop, but it’s still smart to continue reinvesting dividends into the lower price. This will keep your overall investment in the company steady during such times.
Right now, Home Depot is outperforming the S&P 500 and is ranked right in between Sherwin-Williams and Lowes in growth. This middle-of-the-road investment may be just right for your portfolio.
Is Home Depot Stock Overvalued? The Bottom Line
Home Depot is one of the largest retailers in the country and certainly the biggest in its niche. Its stock outperformed the S&P 500, and investors are still bullish on it maintaining this growth heading into 2021.
Much of this is because the company has a forward-thinking business strategy that prepared it for success during a coronavirus pandemic that shuttered traditional retail.
Although pricey, Home Depot still has room to grow, especially if it can snag partnerships to further its competitive advantage over Lowes.
Integrating deeper with its own contractor network should help it resist many of the issues of a bad economy, as the general consumer may start to slow down on home projects if expenses get tight.
People will still need to build or repair buildings, and as long as the construction industry is churning, Home Depot will be ok.
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.