Home Depot (HD) is the largest home improvement retailer in the United States, and it has benefited nicely from COVID-19 lockdowns and attendant remote lifestyles. The question is, with its impressive financials and fundamental strength, will HD be able to retain its luster as investors now begin to focus on turnaround stocks as mass vaccination drives promote outdoor activities? 

The Home Depot, Inc. (HD) has gained 26.3% over the past year, delivering one of the highest returns in the home improvement industry. With the housing market boom and rising demand for do-it-yourself home renovations and improvement projects, HD has soared 12.3% over the past nine months.

However, with the rapid COVID-19 vaccine drive that has already  inoculated one in four adults in the United States, home lockdowns are expected to wane and outdoor activities are expected to witness a strong comeback. Moreover, with President Biden’s vow to vaccinate 100 million American within the first 60 days in office, down from previous projections of 100 days, pent-up demand for outdoor spending is expected to take precedence in the near term.

HD didn’t provide a financial outlook for fiscal 2021 in its latest quarterly report, which did not sit well with investors. As a result, the stock has declined 3% over the past month.

However, HD is expected to regain its momentum as remote working becomes the norm, with most companies working toward establishing a hybrid work model. Moreover, the housing market boom should have a positive spillover effect on the home improvement industry, allowing HD to attain fresh highs soon.

Here’s what we think could shape HD’s performance in the near term:

Resurging Demand

The faster-than-expected macroeconomic recovery and demand for turnaround outdoor stocks have caused HD to slump over the past couple of months. However, the remote working culture is causing a massive exodus from crowded metropolises  to quieter suburbs, thereby increasing the demand for home decoration, improvement and renovation products. Moreover, with the remote working model freeing up time, do-it-yourself home renovation trends are expected to remain strong.

Strong Financials and High Profitability

With a market capitalization of more than $286 billion, HD’s trailing 12-month revenues stand at $132.11 billion. The company has reported $44.85 billion in  gross profits over this period, resulting in a trailing 12-month gross profit margin of 33.95%. As one of the most established companies in the home improvement sector, HD has a trailing 12-month levered free cash flow balance of $14.23 billion, equating to a FCF margin of 10.77%. The company’s levered free cash flow margin is 50.1% higher than the industry average 7.18%.

In addition,  HD’s trailing 12-month ROE is significantly higher than the industry average 4.78%.

Consensus Ratings and Price Target Indicate Potential Upside

HD has an average broker rating of 1.56, which indicates favorable analyst sentiment. Of 36 Wall Street Analysts that rated the stock, eight rated it Strong Buy and 17 rated it Buy.

Furthermore, analysts expect HD to hit $305.42 soon, indicating a potential upside of 17.3%.

POWR Ratings Reflect Promise

HD has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

HD has an A grade for Momentum and B for Quality. These are justified, given the company’s impressive price performance over the past year and higher-than-industry return of equity.

HD is ranked #33 of 63 stocks in the A-rated Home Improvement & Goods industry. In addition to the grades I’ve highlighted above, check out HD’s ratings for Value, Sentiment, Stability and Growth here.

There are 34 stocks in the Home Improvement & Goods industry with an overall rating of A or B. Click here to view them.

Bottom Line

HD is a retail institution and the largest company in the home improvement space, with more than four decades of experience. While the pandemic accelerated the company’s growth over the short term, its  strong financials should allow it to weather any  temporary slump in demand. However, because  the company is expected to regain momentum soon, we believe investing in the stock now could prove  rewarding.