Analysts are projecting 4% revenue growth for the next 4 years! Only lever $HD has is to improve their operating margin. Even if we assume 1% gain in EBIT margin, and eventually hitting 14% and optimistic case being 15%, the net margin could increase to 9.5% ~ 10%. Let us say $HD can do $195 B revenue by 2030 and make $20 B in net profit (both are bit optimistic but not unachievable), that is only $20 EPS. Yes, this is a great franchise, that can grow 1% ~ 1.5% above GDP, but does it demand current multiple?
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I think we know Home Depot does better when people are buying residential property. New car production this year is down by 40%. High interest rates and previous low interest rates discourage new sales. HD is one of a dozen stocks you can name tied to new housing starts. They continue to speak of our bifurcated economy. Tech stocks and AI give us good numbers but our traditional economy is clearly in a valley.
When will economic recovery begin?
Federal Reserve numbers show current housing starts down 30% from the peak in 2006. 2151 vs 1487.
I expect $HD EBIT margin to recover, and thus NP margin. I am not worried about their growth, or margins, which are generally stable and when op margins improves typically it falls directly into the bottom line. My concern is valuation. I would like to buy at better valuation!
If there’s any year I wouldn’t use as a “standard” it’s 2006. That was the tail end of “strippers buying 6 packs of houses”, Liar’s Loans, and a host of other horribles that led directly to the implosion in 2008.
There’s probably no year that’s perfectly designed, but 2006 is about as far on the other end of the scale as I can imagine.
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Another one for the crystal ball. Also Whirlpool. They tend to do well when housing starts are strong. Lower interest rates and low inflation would help. And then fewer jobs from AI.
Will take lots of patience. No hurry to buy.