{"id":30013,"date":"2023-07-01T04:22:33","date_gmt":"2023-07-01T08:22:33","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/home-depot-expectations-can-be-beat-if-recession-is-avoided-nysehd\/"},"modified":"2023-07-01T04:22:35","modified_gmt":"2023-07-01T08:22:35","slug":"home-depot-expectations-can-be-beat-if-recession-is-avoided-nysehd","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=30013","title":{"rendered":"Home Depot: Expectations Can Be Beat If Recession Is Avoided (NYSE:HD)"},"content":{"rendered":"
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In practical and material terms, the American dream has long centered around agricultural land ownership further in our past, and home ownership is the modern-day manifestation of this political touchstone. In our increasingly divided society, it is also what the political scientist John Rawls would call part of the American “overlapping consensus.”<\/span><\/p>\n

In other words, it doesn’t matter what walk of life you come from or what you believe; if you’re a homeowner, you have a standard set of needs wherever you are, and if it is easier to upgrade and maintain your home, well then you will be more likely to engage in such commercial activity. This is the value proposition that had made Home Depot one of the most successful companies in modern American history.<\/p>\n

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Financial Samurai<\/span><\/p>\n<\/figcaption><\/figure>\n

Taking care of a home isn’t easy, and a company there to help you through the frustration, stained clothes, broken glass, and other pitfalls of DIY rightfully earns a unique and memorable place in the consumer’s heart. Home ownership is a crucial part of economic and political identity in the United States, and it is often the cornerstone of accumulated wealth.<\/span><\/p>\n

So the company that assists consumers in being a proper steward of their most valuable asset is almost serving a similar economic function to wealth managers, who help steward other mostly non-physical assets to build wealth.<\/p>\n

One thing that we equity enthusiasts may forget from time to time is that most Americans build wealth with a different kind of equity; home equity. And when you consider this fact, the crucial role that Home Depot (NYSE:HD<\/span>) plays in our allowing tens of millions of Americans to easily maintain, improve, and augment the value of their most precious asset.<\/p>\n

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Washington Center for Equitable Growth<\/span><\/p>\n<\/figcaption><\/figure>\n

There are some companies increasingly threatened by political polarization, and some even fear that certain aspects of our unified market are eroding. If that is true, one of the last holdouts of the common and unified American market will be Home Depot.<\/p>\n

Americans of all stripes love this company, as do the people working that work there. Of course, the shareholders do as well, and this is one of the best-run companies in the country as far as I’m concerned. It’s hard to find a good entry into it because it is rightfully coveted by discerning shareholders. But remember, the stock market really gives you a flashing entry for quality stocks like this one, and given the potential upside in the economy, I think it is a buy right now.<\/p>\n

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Seeking Alpha<\/span><\/p>\n<\/figcaption><\/figure>\n

Here’s a powerful thing about this company and about the brand value they’ve created. I don’t know about you, but I get a positive feeling when I see a Home Depot. You probably do too, and this is not an accident. The company has a culture oriented around putting the consumer above all else and it leaves an impression. They will guide customers of all skill sets to ensure they have what is necessary to complete their project.<\/p>\n

Valuation And Dividend<\/h2>\n

This company is a high-quality stock, a quintessential blue chip. This means you can feel comfortable owning it for a long haul, and initiating a position largely becomes a question of making sure the entry point is advantageous from a risk\/reward perspective. Given the quality of the stock and the premium it has rightly earned, it does appear overvalued on metrics like the Peter Lynch Fair Value model and the Dividend Discount Model.<\/p>\n

\"Multiples\"<\/span> <\/picture>
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valueinvesting.io<\/span><\/p>\n<\/figcaption><\/figure>\n

The multiples look roughly fairly valued though, and there are also other valuation methods that suggest this should be a good time to start a position that you should build over time.<\/p>\n

Home Depot is a stalwart of the Dow Jones Industrial because it is a large company, one of the biggest employers in the country, and it pays about 1% of all taxes paid by corporations in the United States.<\/p>\n

Thus, the company is massive and is an extremely good barometer of economic activity. The stock was normally closely tied to economic cycles, but of course COVID threw this off. But valuation relative to peers looks good right now:<\/p>\n

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TD Ameritrade<\/span><\/p>\n<\/figcaption><\/figure>\n

Like so many other stocks, the analysts have been somewhat thrown off by anomalous demand patterns caused by the pandemic. However, a lot of the COVID hangover is now gone, and if we are indeed entering an economic expansion and bull market, then Home Depot’s recently curtailed guidance should be pretty easy to beat. The firm is currently undervalued with a 5-year discounted cash flow model.<\/p>\n

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valueinvesting.io<\/span><\/p>\n<\/figcaption><\/figure>\n

The intrinsic upside is even more advantageous when you stretch out the time period covered by the model. The upside on the ten-year growth exit model shows more than three times as much upside as the five-year model. The long-term upside is confirmed by using a model based on EBITDA multiples as well. This is why I’m comfortable entering this quality stock at these current levels given the increasing potential for an economic soft landing.<\/p>\n

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valueinvesting.io<\/span><\/p>\n<\/figcaption><\/figure>\n

While I’m not bullish on this stock strictly due to the dividend, it is certainly nice to have and it provides an additional margin of safety. When you have a company like this with such an established brand that so many Americans love, I think that also effectively adds to your margin of safety.<\/p>\n

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Seeking Alpha<\/span><\/p>\n<\/figcaption><\/figure>\n

The payout ratio is approaching 50%, which can definitely be a warning sign. But I am confident that management has properly manged expectations in a way that supports the dividend. Some great analysis from one of my fellow Seeking Alpha Analysts also makes a great case for this assertion.<\/p>\n

You can feel safe buying this stock and while the upside might not match the newest AI thing on a price level, it’s important to remember how well this company is managed and that in terms of increasing profitability, on some metrics, it beats even Apple.<\/p>\n

The company is certainly tied to the fortunes of the US consumer, and there are growing signs that the consumer is becoming beleaguered, but there are also increasing green shoots in the economy particularly in the vital area of housing. Obviously, housing activity is a primary bellwether for Home Depot.<\/p>\n

Housing Strength And Demographic Tailwinds Should Converge To Home Depot’s Benefit<\/h2>\n

There are two different trends in the housing market. Pre-owned sales are down, why new sales are ripping higher. The strength in housing is pretty remarkable given the high rates and I’d say this strength is one of the more compelling points for the bulls arguing that an economic expansion might be possible after the current slowing we’re experiencing.<\/p>\n

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US Census Bureau, HUD<\/span><\/p>\n<\/figcaption><\/figure>\n

Remember, that despite tough talk from the Fed, the June “dot plot” shows economic projections that show the coveted “soft landing” as the most likely scenario. That’s right. Official Fed projections are that we avoid recession.<\/p>\n

Another thing about Home Depot that is nice, is that is largely insulated from the storm clouds in CRE. But the main reason for my bullish thesis is pretty simple and I will lay it out:<\/p>\n