Over the last six months, Home Depot’s shares have sunk to $329.53, producing a disappointing 12.8% loss - a stark contrast to the S&P 500’s 4% gain. This might have investors contemplating their next move.
Is now the time to buy Home Depot, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Home Depot Not Exciting?
Even with the cheaper entry price, we don't have much confidence in Home Depot. Here are three reasons you should be careful with HD and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Home Depot’s sales grew at a sluggish 1.5% compounded annual growth rate over the last three years. This was below our standards.
2. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Home Depot’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.
3. Low Gross Margin Reveals Weak Structural Profitability
We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate product differentiation, negotiating leverage, and pricing power.
Home Depot has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 33.4% gross margin over the last two years. That means Home Depot paid its suppliers a lot of money ($66.63 for every $100 in revenue) to run its business.
Final Judgment
Home Depot isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 22.1× forward P/E (or $329.53 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at one of our top digital advertising picks.
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