Home Depot Stock May Benefit From Low Expectations in 2020

There are several reasons why HD stock may pleasantly surprise investors

Last year was an exceptional year for Home Depot (NYSE:HD) stock, as HD stock is up over 31% in the last 12 months. This growth comes despite the stock dropping over 10% after the company’s last earnings report. In that report, the company beat on earnings, but fell short of revenue expectations.

Home Depot Stock May Benefit From Low Expectations in 2020
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Furthermore, the company also disappointed investors with a total sales growth forecast for 2020 of 3.5% to 4%. And while this number would be higher on a year-over-year basis, it was far below the growth Home Depot was projecting just two years ago.

However, what may have been bad news for traders may be great news for investors. This is because the long-term outlook for HD stock still looks favorable.

As I see it, there are several reasons for investors to be excited about Home Depot stock. First, it’s a company that should benefit no matter how the housing market plays out. It is successfully migrating to the omnichannel model that is propelling successful retail stocks. And, it still is a great dividend stock that makes it an exceptional choice for total value investors.

The Company Doesn’t Need New Home Sales

On the surface, that may sound like a ridiculous statement. But the reality is that while the builder market is important to Home Depot, so is the remodel market — and that’s what I want to take a look at.

The Wall Street Journal published a study from the real-estate brokerage Redfin in which homeowners reported they were staying in their homes 5 years longer, on average, than they were in 2010. But for Home Depot, that can be a positive sign. Just because a homeowner decides to stay in their home doesn’t mean they want their home to stay the way it is. They frequently remodel, and that’s great news for Home Depot.

During its Investor Day event in December 2019, the company cites healthy consumer spending, low unemployment and rising wages as three reasons for optimism. Additionally, with overall home equity rising, homeowners have the means to embark on renovations.

However, that doesn’t mean Home Depot is discounting new home sales. Home Depot’s Executive Vice President and Chief Financial Officer Richard McPhail forecasted a 1.8% rise in GDP in 2020.

“While we don’t expect to see the same tailwinds as in prior years, we do expect to see a positive influence from housing,” he said.

One Home Depot Is Still Developing

Another perceived catalyst for Home Depot’s long-term growth is the company’s omnichannel “One Home Depot” initiative. Helping consumers get the products they need anytime, anyway, anywhere is not inexpensive. The anticipated cost of One Home Depot is $11 billion, and as part of that investment, the company is spending $1.2 billion to create 150 new distribution facilities. When all facilities are operating, Home Depot will be able to provide same-day or next-day delivery to 90% of the country.

Over time, analysts see this as being a source of growth for Home Depot. However, in the short term, the company is still absorbing those costs.This is at a time when the company is already forecasting tighter margins and revenue that is below analysts’ expectations.

Nonetheless, although the move toward omnichannel may be expensive, most industry analysts consider it to be essential. Particularly since Amazon (NASDAQ:AMZN) is rumored to be looking into finding a foothold in the home-building sector.

Investors Can Buy HD Stock for Its Dividend

As InvestorPlace contributor Dana Blankenhorn pointed out recently in a column, Home Depot has offered a substantial dividend that has continued to grow over the past 20 years. In fact, Blankenhorn points out that Home Depot’s current dividend would be a 13% yield against the company’s 2001 stock price.

Overall, the dividend looks very secure. Even as revenue is disappointing some analysts, it is still increasing on a year-over-year basis. And that’s great news if you’re looking to get yourself some HD stock.

As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/01/hd-stock-benefit-low-expectations-2020/.

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