Home Depot: Rate Cuts Now Priced In, Downgrade to Neutral
Rating Downgrade (HD US) (Neutral): Shares are at a multi-year high after the Fed’s first rate cut in September, and investors may be too optimistic.
Highlights
Shares are at ~28x guided FY24 EPS, having risen ~40% in the past year.
Comparable sales expected to fall 3-4% in FY24, after falling 3.2% in FY23.
We believe current FY24 outlook represent roughly normalized earnings.
We believe EPS growth will resume at ~10% in FY25, but business is cyclical.
At $411.26, we see 21% total return (6.2% annualized). Downgrade to Neutral.
Introduction
We are downgrading our rating on Home Depot after shares closed at a new multi-year high yesterday (October 2):
Home Depot Share Price (Last 5 Years)
Source: Google Finance (02-Oct-24).
Home Depot shares have gained 43.7% (including dividends) since we initiated our Buy rating in May 2023. It also generated a 10% gain as a small holding in our “Select 15” model portfolio between February and July this year. (With hindsight, we were too conservative.) We also held Home Depot in real life but have fully exited as of this morning.
While we believe Home Depot will continue to compound long-term, medium-term returns are now likely limited by valuation, having priced in upcoming rate cuts and the return of sale growth, but not a potential downturn.
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