Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
Key Morningstar Metrics for Home Depot
What We Thought of Home Depot’s Earnings
Home Depot HD delivered first-quarter sales growth of 9.4%, buoyed by its acquisition of SRS, but same-store sales fell 0.3%, hurt by a 70-basis-point foreign exchange headwind. Despite struggling home turnover, the firm held its full-year outlook for sales growth of 2.8% and adjusted EPS 2% lower.
Why it matters: Although housing supply has improved modestly to four months, existing home sales remain subdued, falling 2.4% in March. We don’t expect either turnover or demand to pick up materially over the next few quarters, keeping Home Depot’s sales growth subdued.
Interest rates appear to be the limiting factor in housing transactions. Morningstar’s average annual 30-year mortgage rate forecast doesn’t fall below 6% until 2026 from 7% currently, when faster growth could again result in cost leverage.We think Home Depot will continue to take share in its markets, particularly across the professional segment, as cross-selling opportunities abound and SRS takes the lead on the firm’s trade credit program. This should support long-term average annual sales growth of 4%.
The bottom line: We don’t plan any material change to our USD 305 fair value estimate for Home Depot and view shares as rich at 26 times our 2025 EPS estimate. We believe the premium multiple awarded to the best-in-class retailer is outsized to the 6% EPS growth we model over the next five years.
We view the firm’s commitment to its everyday low-price strategy, which should continue to uplift the brand, as a key tenet underlying our wide moat rating. The pass through of savings to consumers will hold our gross margin outlook to around 33.5% over the next decade.The firm’s scale has helped it maintain its 2025 outlook, as sourcing diversification and negotiating leverage should help the adjusted operating margin reach 13.4%, down just 10 basis points despite tariffs. Fortunately, more than 50% of Home Depot’s products are sourced in the US.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
