Michael Kamerman, CEO of Skilling, shares his opinion on what stock you should watch this week.

Home Depot

Home Depot is the multinational giant of home improvements, tools, building materials and a paradise for DIY enthusiasts. The first wave of the Covid-19 pandemic might already seem like a lifetime ago to some, but Home Depot was one company that did in fact benefit from the Covid-19 lockdown restrictions.   

The pandemic ‘DIY boom’ that occurred as a result of populations being restricted to their homes sent shares in the company soaring, with the earnings per share (EPS) metric initially peaking at $4.02 in Q2 2020. The performance of shares since has remained respectable, albeit erratic with quarterly EPS fluctuating between $2.65 in Q4 2020 and $4.53 in Q2 2021. 

The share price has recovered from the lows and is testing resistance, with the 200-day moving average not out of sight either.

Q1 2022 proved to be better than expected: earnings per share reached $4.09, up from $3.86 a year earlier and higher than analysts’ predictions of $3.69 per share.

However, it remains to be seen whether this solid performance can continue. As housing markets across the US and Canada continue to slow, how robust will the demand for home improvement be? 

It’s not only a matter of choice. In the red-hot pandemic housing market, many buyers waived the usual due diligence and checks to get ahead of the pack and ensure their offer was accepted. In further good news for Home Depot, home improvement isn’t solely driven by the cycle of the housing market, especially in today’s new working paradigm when working from home has become far more commonplace. 

As much of the current slowdown in the property market has been attributed to the increase in mortgage rates, this could also incentivise people to stay put, ride out the storm, and improve their existing homes rather than looking to trade up and pay a higher mortgage rate.

For Home Depot, it doesn’t really matter what their customers’ motivations are. If they’re still making improvements, they’re still buying. Therefore, the bigger risk is a downturn in consumer spending altogether; likely the biggest headwind with inflation continuing to rise across the globe.

There’s been plenty of talk of ‘squeezed’ consumers, but companies haven’t yet reported a huge squeeze on profits this earnings season, with consumer spending having held up far better than expected. 

Home Depot surpassed estimates for its quarterly results, published on 15th August. Investors have eagerly been anticipating this upturn to continue and are expected to home in on the company guidance, both from the consumer perspective and the profitability point of view. Many raw material and input costs have fallen back from their peaks, which could relieve concerns about profit margins soon coming under pressure. 

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Not investment advice. Past performance does not guarantee or predict future performance.