Over the last six months, Home Depot’s shares have sunk to $328.82, producing a disappointing 7.9% loss - a stark contrast to the S&P 500’s 8.4% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Home Depot, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Home Depot Not Exciting?
Even though the stock has become cheaper, we’re swiping left on Home Depot for now. Here are three reasons we avoid HD, plus one 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 experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Home Depot’s sales grew at a sluggish 2.3% 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
Gross profit margins are an important measure of a retailer’s pricing power, product differentiation, and negotiating leverage.
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 33.2% gross margin over the last two years. That means Home Depot paid its suppliers a lot of money ($66.77 for every $100 in revenue) to run its business.
Final Judgment
Home Depot’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 21.3× forward P/E (or $328.82 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We’re fairly confident there are better investments elsewhere. Let us point you toward an all-weather company that owns household favorite Taco Bell.
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