Market is much too skeptical of Home Depot, analysts advise

May 18, 2022 11:00 AM ETThe Home Depot, Inc. (HD)LOWBy: Kevin P. Curran, SA News Editor41 Comments

Orange Home Depot Sign

Romanista/iStock Editorial via Getty Images

Home Depot (NYSE:HD) is not getting enough credit for its earnings beat, per a number of new analyst notes on Wednesday.

Despite nailing earnings on Tuesday, especially in contrast to Lowe’s (LOW -2.6%), Home Depot (HD -3.3%) stock has been hammered in recent trading. For its earnings release on Tuesday, shares initially popped in pre-market action and opened moving upward before the gravitational pull of Walmart’s earnings miss eroded the gain. Shares of the Atlanta-based specialty retailer closed negative on the day and added to those losses in early trading on Wednesday.

“Skeptics believe 1Q is likely the last strong quarter HD will report for a while and trends will slow from here as macro pressures weigh on demand,” UBS analyst Michael Lesser said, explaining the adverse reaction to the beat and raise. “They fear that HD's outlook for positive comps in [the second half of the year] might not be achievable. Further, HD's price increases could mean others will raise prices as well, leading to inflation staying stronger for longer.”

However, Lesser was not eager to fall in line with the glass-half-empty outlook of these skeptical voices.

“We remain bullish on HD and believe that the risk-reward is skewed to the upside at these levels,: he declared. “The company is clearly executing at a high level and home improvement demand could prove to be more durable than what the market expects.”

Lesser added that recent pullbacks provide “an attractive entry point” as the retailer continues to gain market share and shows resilience to inflationary pressures. He assigned a $360 price target to the stock and reiterated his “Buy” rating.

Lesser was joined by Bank of America analyst Elizabeth Suzuki who likewise downplayed pessimism on the company’s prospects.

“Superior strategy and execution have underpinned HD's market share gains over the last decade, and we believe HD will continue to outperform the overall renovation category, which has favorable tailwinds for the near and long term,” she wrote. “Improvements to productivity and supply chain should help to drive margin improvement, partially offset by near-term investments to drive future growth and deepen HD's competitive moat.”

Suzuki concluded that Home Depot’s (HD) strong results that stand in stark contrast to cautious reports from other retailers supports faith in management’s ability to execute. In light of Lowe’s (LOW) report on Wednesday morning, that bifurcation is only more prominent. Suzuki reiterated her “Buy” rating on shares much the same as Lesser. Yet, she assigned an even higher price target of $392 to the stock, suggesting significant upside even as inflation anxiety and general skepticism stall what she feels is deserved earnings-driven momentum.

Read more on Lowe’s earnings release on Wednesday.

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