No Quick Fix for Home Depot (HD) as Market Conditions Deteriorate
Confident Investing Starts Here:
Tariffs: A Costly Curveball
Tariffs are hitting Home Depot hard, especially with nearly half its sales tied to imported goods. The U.S. recently adjusted tariffs on Chinese imports to 30% and slapped a 10% duty on other countries, which, while a short-term breather, continues to mess with orders and pricing. CFO Richard McPhail emphasized during the Q1 earnings call that Home Depot won't raise prices to offset these costs, choosing instead to absorb them or tweak its product lineup. This strategy will protect customers, but it will also squeeze margins, which already took a 40-basis-point hit in Q, partly due to tariffs. With trade policies still in flux, this pressure will not likely ease soon.
Fortunately, the company's diversified supply chain and strong pro business (50% of sales) give it some wiggle room compared to rivals like Lowe's, which relies more on Chinese imports. However, absorbing a blended tariff cost on goods in the mid-single-digits isn't trivial. If trade tensions heat up, Home Depot could be forced to ditch its no-price-increase policy, which might tick off customers or squeeze profits even more. For now, tariffs are a persistent pain in the neck.
Housing Market Blues
In the meantime, the housing market is in a funk, and Home Depot is naturally feeling the pinch. High mortgage rates, now hovering close to 7%, have frozen homebuyers, slowing turnover and big-ticket renovation projects. Evidently, even though Q1 sales reached $39.86 billion, up 9.4% year-over-year, comparable sales dipped 0.3%, signaling weaker demand for major projects. Customers are sticking to smaller jobs, like spring gardening, which boosted transactions by 2.1% but didn't move the needle on average ticket size.
I believe squeezed consumer spending power and high rates will suppress demand for pricey remodels. Indeed, Home Depot's guidance assumes this trend lasts, with management noting 'continued pressure on larger projects' in the earnings call. With no clear catalyst like falling rates or a housing rebound on the horizon, this headwind could linger into late 2025, keeping sales growth muted.
Rising Financing Costs Sting
Higher financing costs are another hurdle. After Moody's downgraded the U.S. credit rating to AA1, 10-year and 30-year Treasury yields climbed, pushing up borrowing costs for home improvement projects. This hits Home Depot's core customers (both DIYers and pros) who often finance large purchases. The latest report didn't directly tie this to performance, but management acknowledged the broader impact of higher yields on consumer behavior.
Overall, the current environment discourages splurging on appliances or major renovations, as seen in flat average ticket sizes. It's also worth noting that Home Depot's acquisition of SRS Distribution, which serves pros, added sales but also drove a 15-basis-point margin drag, partly due to financing sensitivity in that segment. With yields likely to stay high, this is another headwind that could keep weighing on demand, especially if economic uncertainty persists.
A Pricey Stock in a Tough Spot
Despite these challenges and notable pressure lately, Home Depot stock still trades at a lofty 24x this year's expected EPS of ~$15. This feels steep for a company staring down flat EPS growth in 2025. And yes, Home Depot's a quality name, with a rock-solid pro business and decades-long track record of successful execution, but a premium valuation paired with lackluster growth is a tough sell.
Today's valuation essentially assumes a recovery that's not guaranteed soon. Consensus estimates point to a 0.6% EPS growth for FY2026, and management's cautious tone on the Q1 call, including stressing tariff and housing pressures, doesn't inspire confidence. So while Home Depot's brand and scale deserve some premium, the gap between its price and growth prospects could keep sentiment sour, especially if headwinds persist.
Is Home Depot Stock a Good Buy Right Now?
Despite the fog surrounding Home Depot's investment case, Wall Street analysts seem somewhat bullish. Specifically, HD stock features a Strong Buy consensus rating based on 20 Buys, six Holds, and zero Sell recommendations over the past three months. At $428.74, the average HD stock price target implies an upside potential of ~18% from current levels.
Caution Is Warranted on Home Depot
Home Depot's recent stock decline may attract value-oriented investors, but the path forward appears challenging. Persistent headwinds—including tariffs, a sluggish housing market, and rising financing costs—remain firmly in place, as reflected in the company's latest earnings report.
With limited growth prospects and a valuation of 24x earnings, the stock currently seems more like a potential value trap than a bargain. For long-term investors, it may be prudent to wait for clearer signs of recovery, such as easing trade pressures or declining interest rates, before considering an entry point.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Yahoo
11 minutes ago
- Yahoo
Lowe's to buy Foundation Building Materials for $8.8 billion to boost contractor business
(Reuters) -Lowe's Cos said on Wednesday it has agreed to buy interior building products distributor Foundation Building Materials for nearly $8.8 billion, stepping up its expansion into the professional builder market. Shares of the home improvement chain rose 4.3% in premarket trading as the company also beat second-quarter profit estimates. Lowe's and rival Home Depot are leaning on deals to bolster their businesses that serve contractors and builders, a key growth area, amid softness in the do-it-yourself segment. Lowe's acquired Artisan Design for $1.33 billion in April, while Home Depot in late June decided to buy specialty building products distributor GMS for about $4.3 billion. The company raised its total annual sales forecast to a range of $84.5 billion to $85.5 billion, compared to its prior expectation of $83.5 to $84.5 billion. It earned $4.33 per share on an adjusted basis in the quarter, exceeding estimates of $4.24, according to data compiled by LSEG. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Business Insider
14 minutes ago
- Business Insider
Elon Musk says Tesla's new six-seat Model Y might never come to the US
Tesla's new six-seat Model Y is creating plenty of buzz in China — but don't expect to see it in the US anytime soon. CEO Elon Musk said on Wednesday that the Model Y L, an extended version of Tesla's most popular vehicle with three rows of seats, might never arrive on American shores. "This variant of the Model Y doesn't start production in the US until the end of next year. Might not ever, given the advent of self-driving in America," wrote Musk in a post on X. The Model Y L, which adds new features including a rear row of foldable seats and powered armrests, went on sale for $47,200 in China on Tuesday. Its launch comes as Tesla battles fierce competition from local EV players like BYD, Xiaomi, and Xpeng. Electric vehicle adoption in China is far higher than in the US, and Chinese companies have rapidly taken market share with a wave of affordable electric models packed with high-tech features, including autonomous driving and voice controls. The Model Y, China's best-selling SUV, is facing a number of new challengers. In June, smartphone giant-turned EV maker Xiaomi launched the YU7, an electric SUV priced just below the Model Y. Xiaomi says the YU7 received nearly 300,000 preorders in an hour after it launched. EV startups Xpeng and Nio have also unveiled their own Model Y rivals in recent weeks. In the US, where Chinese EVs are not available due to high tariffs, Tesla has increasingly focused on its robotaxi and ride-hailing services. The company launched its first robotaxi service, which is currently invite-only, in Austin in June. Musk has predicted that driverless vehicles will become the norm over the next decade, and told investors last October that building a regular non-robotaxi model would be "pointless." The last new product Tesla launched in the US was the Cybertruck, which has been a sales flop since it made its debut in 2023. The company has said it is planning to release an affordable model, which Musk has described as "just a Model Y," in the fourth quarter of 2025.
Newsweek
an hour ago
- Newsweek
Nikki Haley: Trump Needs To Rebuild U.S.-India Relationship
In July 1982, President Ronald Reagan welcomed Indian Prime Minister Indira Gandhi to a state dinner at the White House. Toasting the friendship between our "two proud, free peoples," he said: "although our countries may travel separate paths from time to time, our destination remains the same." Four decades later, the U.S.-India relationship is at a troubling inflection point. To achieve the Trump administration's foreign policy goals—outcompeting China and achieving peace through strength—few objectives are more critical than getting U.S.-India relations back on track. The last few weeks have seen an explosive series of events. The Trump administration has threatened India with 25 percent tariffs for purchasing Russian oil, on top of the 25 percent President Donald Trump already slapped on Indian goods. These developments followed months of rising tension, including over the U.S. role in India-Pakistan ceasefire negotiations. Trump is right to target India's massive Russian oil purchases, which are helping to fund Vladimir Putin's brutal war against Ukraine. India has also traditionally been among the most protectionist economies in the world, with an average tariff rate more than five times the U.S. average in 2023. But India must be treated like the prized free and democratic partner that it is—not an adversary like China, which has thus far avoided sanctions for its Russian oil purchases, despite being one of Moscow's largest customers. If that disparity does not demand a closer look at U.S.-India relations, the realities of hard power should. Scuttling 25 years of momentum with the only country that can serve as a counterweight to Chinese dominance in Asia would be a strategic disaster. WASHINGTON, DC - MAY 22: Former U.N. Ambassador Nikki Haley announced that she would vote for former President Donald Trump during an event at the Hudson Institute on May 22, 2024 in Washington, DC. WASHINGTON, DC - MAY 22: Former U.N. Ambassador Nikki Haley announced that she would vote for former President Donald Trump during an event at the Hudson Institute on May 22, 2024 in Washington, the short term, India is essential in helping the United States move its critical supply chains away from China. While the Trump administration works to bring manufacturing back to our shores, India stands alone in its potential to manufacture at China-like scale for products that can't be quickly or efficiently produced here, like textiles, inexpensive phones, and solar panels. When it comes to defense, India's expanding military ties with the United States, Israel, and other American allies make it a crucial asset to the free world's security, and a rapidly growing market for U.S. defense equipment and cooperation. India's growing clout and security involvement in the Middle East could prove essential in helping to stabilize the region as America seeks to send fewer troops and dollars there. And India's location at the center of China's vital trade and energy flows could complicate Beijing's options in the case of a major conflict. In the longer term, India's significance is even more profound. Home to more than a sixth of humanity, India surpassed China as the world's most populous country in 2023, with a young workforce that contrasts with China's aging one. It is the world's fastest-growing major economy—soon to eclipse Japan as the world's fourth largest. India's rise represents the most significant geopolitical event since China's, and is among the greatest obstacles to China's goal of reshaping the global order. Simply put, China's ambitions will have to shrink as India's power grows. Yet, unlike Communist-controlled China, the rise of a democratic India does not threaten the free world. Partnership between the U.S. and India to counter China should be a no-brainer. India and China are unfriendly neighbors that have conflicting economic interests and ongoing territorial disputes, including a lethal skirmish over contested borders as recently as 2020. It would serve America's interests to help India stand up to its increasingly aggressive northern neighbor, both economically and militarily. And it would be a massive—and preventable—mistake to balloon a trade spat between the United States and India into an enduring rupture. If that were to happen, the Chinese Communist Party would be quick to play India and the United States against one another. For its part, India must take Trump's point over Russian oil seriously, and work with the White House to find a solution. As for the United States, the most urgent priority should be to reverse the downward spiral, which will require direct talks between President Trump and Prime Minister Narendra Modi. The sooner the better. The administration should focus on mending the rift with India and giving the relationship more high-level attention and resources—approaching what the U.S. devotes to China or Israel. Decades of friendship and good will between the world's two largest democracies provide a solid basis to move past the current turbulence. Navigating challenging issues like trade disagreements and Russian oil imports demand hard dialogue, but difficult conversations are often the sign of a deepening partnership. The United States should not lose sight of what matters most: our shared goals. To face China, the United States must have a friend in India. Nikki Haley, the Walter P. Stern Chair at the Hudson Institute, was US ambassador to the United Nations and governor of South Carolina. Bill Drexel is a fellow at the Hudson Institute. The views expressed in this article are the writers' own.
