Will Home Depot Inventory Follow the Housing Market?
The spiraling inflation that started several months ago has hobbled consumers’ wallets and forced the Federal Reserve to increase interest rates quickly to achieve a better balance between supply and demand. And recently, the central bank indicated that it would do whatever it takes to control prices, which could lead to financial stress for many Americans.
As a result of the slowing economy, the housing market It was definitely starting to soften, too. could Home Depot (HD -0.50%)a $295 billion company that caters to this specific industry, do you see its business and stock weakening as a result?
inflation still raging. In July, the CPI was up 8.5% from a year ago. This means that the central bank will continue its aggressive policy of raising interest rates in order to remedy the situation. This has caused mortgage rates to skyrocket in 2022. The 30-year flat rate is now 5.55%, the highest since late November 2008 (not counting June 2022).
As mortgage rates rise, increasing the cost of financing, it becomes more expensive to buy a home. This could lead to lower demand, and cool down the housing market a bit.
According to data from RedfinThe median home price in the United States fell for the second month in a row in July and now stands at $413,000. The number of homes sold in July was down 23.1% year over year. Consumers who struggle to pay for everyday things like groceries and gas are increasingly likely to refuse to buy a more expensive home.
How could a weaker housing market affect Home Depot’s business? It has to do with a behavioral economic theory called the wealth effect. On Home Depot’s Q1 2022 earnings call, Chief Financial Officer, Richard McPhail said: “Throughout our history, we’ve seen that home price appreciation is the primary driver of home improvement demand. When you value your home, you consider it a smart investment as you spend more on it.” . Therefore, the weakness of the housing market could be a major headwind.
But so far, Home Depot management said there weren’t many negative effects. She reported that more than half of homes in the United States are over 40 years old. Home prices have risen significantly over the past two years, despite a slight decline recently.
In the most recent quarter (ending July 31), the company’s revenue jumped 6.5% and net income rose 7.6% compared to the same period last year. Consumer demand for renovation projects remains strong as both the professional and do-it-yourself segments have grown and they still have a healthy backlog of projects. This is the Positive sign for shareholders.
Home Depot is a solid long-term investment
There have been multiple instances over the past decade when mortgage rates have risen rapidly. But that hasn’t stopped Home Depot’s business from continuing to fluctuate over the years. From fiscal year 2011 through 2021 (ending January 30 of this year), the company’s revenue grew 115% and Diluted earnings per share by 529%. The stock has followed this stellar underlying performance, rising more than 400% over the past decade.
Home Depot’s sheer size may dissuade some investors who may think this business doesn’t have much opportunity to expand. But according to management, Home Depot is slowly nipping at a whopping $900 billion opportunity, with the professional and professional markets estimated at $450 billion each. It’s never too late to step into this winning investment since Home Depot represents only 17% of the entire industry today.
For existing shareholders, the weak housing market, along with rising interest rates, is no reason to sell because this company still has a lot of market share to steal. And for those on the fringes, Home Depot is attractive P/E Ratio Under 18 – Cheaper Than Standard & Poor’s 500A multiplier of nearly 23 – makes the stock a sound financial choice.
Neil Patel has positions at Home Depot. Motley Fool has positions at and recommends Home Depot and Redfin. Motley Fool recommends the following options: Short August 2022 calls at $13 on Redfin. Motley Fool has a disclosure policy.