Home Depot’s share price capitalises on a year of improvement

Home Depot’s [HD] share price has had a productive year. Up 27.27% for the year to date as of 16 November’s close, Home Depot’s share price is sitting just 4.79% below its 52-week high set in August. With the company’s third-quarter earnings due to be announced on 17 November, investors will hope that Home Depot’s share price can continue to build value.

After opening the year at $219.08, Home Depot’s share price collapsed to $140.63 during the depths of the March market selloff. Home Depot’s share price recovered over the next two months and significantly improved throughout the third quarter. The stock peaked at $259.29 on 10 June before setting an all-time high of $292.95 on 27 August.

Despite falling to $262.03 on 30 October, Home Depot’s share price recovered over the next week to close at $284.24 on 6 November.

Crowds and the cloud

The foundations for Home Depot’s share price growth and earnings-beating year were put in place soon after the coronavirus pandemic set in. The home improvements vendor was designated an essential retailer during global lockdowns, allowing it to continue operating as normal – with some precautionary crowd-management measures thrown in.

This provided a tailwind not just for Home Depot but also for its customers, who took advantage of the extra time spent indoors to increase efforts on home improvement projects during lockdown. While in-store trading continued, Home Depot experienced a massive increase in digital sales in the second quarter, which CEO Craig Menear said more than doubled on the earnings call. The company posted its strongest set of results for decades, with revenue soaring to over $38bn.

The biggest challenge the hardware store faces is keeping that demand going. Home Depot’s CIO Matt Carey credits much of the company’s performance for the year-to-date on technological innovations, including its crowd-limiting apps and a shift in online operations to cloud-based platforms.

The shift has enabled Home Depot to offer safe, convenient and flexible shopping options to customers at scale. When asked by TheWall Street Journal how the company plans to maintain demand, Carey hinted that Home Depot’s digital renovation is set to continue. “We continue to invest in capabilities that make it easier for customers to choose, however, whenever and wherever they want to shop with us,” he said.

“We continue to invest in capabilities that make it easier for customers to choose, however, whenever and wherever they want to shop with us” - Home Depot’s CIO Matt Carey

Despite its focus on building an online presence, early indications are that the DIY boom that accompanied lockdown in the second quarter has slowed, with consumers now increasingly out of their homes and mostly having completed any overdue projects. Profitability could also take a hit from Home Depot’s payment of $480m in compensation to its employees as a result of the coronavirus pandemic, according to The Motley Fool.

Zacks Equity Research forecast sales to fall to $31.88bn in the third quarter, with even the most optimistic analysts forecasting just $34.5bn. Earnings are also expected to fall to $3.06 per share. While these numbers are well below Home Depot’s second-quarter performance, both sales and earnings are set to increase from the same period in 2019, growing by 17.1% and 20.9%, respectively.

Analysts consider Home Depot’s share price a Buy

The outlook for Home Depot’s share price is optimistic. Though earnings and sales are forecast to fall in the upcoming third quarter, it is not predicted to slip below its first-quarter levels, which is an indication that analysts believe Home Depot will be able to sustain some of the gains it made during the volatile conditions of the coronavirus pandemic.

With most analysts predicting profitability to rise in both 2020 and 2021 — despite flattening sales figures — the consensus among the 33 analysts polled by CNN Money is to Buy the stock. A majority of 17 analysts hold this rating, while three rate it Outperform and 12 suggest investors Hold. Only one analyst recommended selling and none gave the stock an Underperform rating.

Among 29 analysts offering 12-month price forecasts for Home Depot, the median target of $310 implies a 10.88% increase on Home Depot’s share price (as of 16 November’s close).