Home Depot (NYSE:HD) stock usually moves on news of the broader economy or the housing market. These days, however, investors in the big-box retailer are focusing on technology. HD stock is up 14% in the last six months, compared with an 11.8% gain for the S&P 500 index.
In 2017, Atlanta-based HD announced a three-year, $11 billion digital transformation plan called “One Home Depot,” which involves hiring more than 1,000 new IT workers to improve its website and mobile app, and streamline its operations, among other things.
Fast forward to the present, and not surprisingly, the transformation has hit a few “hiccups” with projects such as HD’s B2B website geared toward building contractors.
Computer Glitches Weigh On HD Stock
“Much of this IT work requires unwinding our legacy systems,” HD CEO Greg Menear said on the company’s recent earnings conference call. “And that has proven to be more complex than originally anticipated.”
Among the challenges HD is facing is with a B2B website it is developing for large contractors, a challenge which Menear argues will pay off for the retailer in the long run.
“Our investments in a personalized B2B website experience is a significant component of the unique value proposition we’re creating for our pros,” he said. “As you would expect, the most engaged customer cohort is 135,000 pros that we on-boarded at the beginning of the year. And we’re seeing a meaningful lift in spend as these customers become more familiar with the new experience.”
Forrester Analyst Allen Bonde recently told Forbes that it’s not uncommon for multi-year transformations to hit “bumps in the roads” caused by legacy systems. Indeed, it would be a shock if HD didn’t encounter these problems.
HD Stock Valuation Is Too Cheap To Ignore
Unfortunately, HD shares fell more than 5% when the “bad news” about the company’s IT strategy was revealed. The costs of the digital transformation are evident in HD’s latest earnings report. Net income fell to $2.8 billion, or $2.53 share. Sales rose a disappointing 3.5% to $27.22. The company’s comparable sales — the closely watched metric measuring the performance of stores opened for at least 12 months –also lagged analysts’ expectations, posting a gain of 3.8%.
HD lowered its earnings guidance for the second straight quarter, which is never a good thing. However, I think the time is right to buy HD stock. The company will find a way to resolve its technical issues. Moreover, the housing market appears to be solid. Permits for new-home construction recently hit a 12-year high, and experts expect home prices to continue to rise in 2020.
HD Stock Versus Lowe’s
The valuation for HD stock also is compelling. HD’s trailing price-to-earnings multiple is 21.71x, far cheaper than the 31.66x estimate for rival Lowe’s Companies (NYSE:LOW). Home Depot shares are currently trading at roughly a 13% discount to analysts’ average 52-week price target of $245. The outlook also is better at HD.
HD’s revenue in the current 2020 fiscal year is expected to rise by 2.4% to $110.7 billion. Lowe’s is expected to post fiscal 2020 sales of $72.53 billion, a 1.7% gain.
About the only thing that could derail HD’s stock is a recession, which some experts say could happen in 2020. If that does happen, HD should be able to weather the downturn fine just as it did during the Great Recession.
Jonathan Berr doesn’t own shares of the stocks mentioned above.