Is Home Depot stock a buy now after earnings?

The latest quarterly update from Home Depot (HD 2.80%) showed more mixed signals. While the home improvement giant delivered a better-than-expected financial result, management’s light guidance overshadowed the report. Shares fell about 8 percent from a 52-week high, highlighting continued uncertainties about consumer spending and the company’s exposure to volatile housing market conditions.

Are there enough upsides to overcome near-term macroeconomic headwinds? Let’s examine whether the recent selloff presents a good opportunity to buy Home Depot stock for your portfolio.

A cautious outlook from management

Home Depot has been defined by its resilience in recent years, successfully sustaining profitability through a changing post-pandemic context. This theme was put to the test in early 2024.

In the second quarter, Home Depot reported earnings per share (EPS) of $4.67, $0.12 ahead of the average Wall Street estimate and roughly flat from the year-ago quarter. Revenue of $43.2 billion rose 1% year-over-year and also topped consensus.

These headline numbers are positive, but the context here is also important. In that case, Home Depot’s acquisition of SRS Distributors in March added $1.3 billion to total revenue in Q2, while comparable U.S. sales fell a disappointing 3.6 percent. This includes a slowdown in customer traffic in stores as well as a lower average price of tickets sold.

The company has done a good job managing margins through cost-saving initiatives, but what it can’t control is a more challenging operating environment. That was the message from Chief Executive Ted Decker, who described weaker demand as warranting caution. In the Q2 conference call, he said:

Higher interest rates and greater macroeconomic uncertainty weighed on consumer demand overall, leading to weaker spending on home improvement projects. When we look at the performance in the first six months of the year, as well as the continued uncertainty about underlying consumer demand, we believe a more cautious sales outlook for the year is warranted.

Home Depot now expects full-year comparable sales to fall between 3% and 4%, revised down from its previous forecast of a 1% decline issued earlier this year. The company also sees 2024 adjusted EPS down 1% to 3% from 2023, reversing previous guidance for 1% growth.

Image source: Getty Images.

Home Depot at a premium valuation

Quarterly noise aside, it’s fair to say that Home Depot’s fundamentals remain solid, even if current trends are going through a rough patch. A strong point was efforts to expand digital capabilities, as online sales grew 4% over the past year.

There is also some enthusiasm for the SRS Distributors business, which management believes can be a growth engine for the company, marking an expansion and diversification into the professional building materials market.

Home Depot stock offers investors a 2.5% dividend yield, which is well supported by its underlying free cash flow. Ultimately, the bullish case for the stock is that the company will get stronger as the economy improves, with potential Fed interest rate cuts in 2025 as a catalyst for a rebound in demand for consumer home improvement activity.

On the other hand, evaluation is an area that deserves some attention. Shares of Home Depot trade at about 24 times management’s 2024 EPS guidance. Notably, this level is above the company’s five-year average, which is closer to 23, implying that the stock is relatively expensive. That doesn’t mean the stock needs to be sold from here, but it does make growth more difficult in the short term.

The market appears to be giving the company the benefit of the doubt, already anticipating a recovery despite lingering uncertainties. The main risk to consider is a scenario where conditions deteriorate further, forcing a lower revaluation of the earnings trajectory.

HD PE Ratio data (before) by YCharts.

Decision time for Home Depot stock

I think Home Depot stock deserves a hold rating for current shareholders, while investors considering adding to a position might be better off with a wait-and-see approach. Until Home Depot shows evidence that comparable sales can turn positive as a key metric to watch, I expect the stock to remain volatile.