Home Depot (HD) shares performed strongly in 2020 and hit a record high despite the COVID-19 pandemic. The demand for the home improvement retailer’s products was lifted in 2020 due to the lockdown restrictions. What’s the forecast for Home Depot shares in 2021?
Home Depot shares are up 14.6% over the past year and 5.3% so far in 2021. The shares are down 4.5% from their 52-week highs but have almost doubled from their 52-week lows. Before we look at the forecast for Home Depot shares in 2021, let’s consider the company’s earnings estimates.
Home Depot earnings estimates
Home Depot releases its fourth quarter 2020 earnings on Tuesday. Analysts expect the company’s revenues to rise by 18.4% in the quarter to $30.5 billion. In the third and second quarter of 2020, the company’s revenues increased by 23.2% and 23.4% respectively. Analysts expect the company’s adjusted EPS to rise by 14.2% to $2.60 in the fourth quarter.
Home Depot’s sales were on a high trajectory last year amid the COVID-19 pandemic. The company posted double-digit revenue growth as consumers spent more on home improvements. However, the pandemic-driven boost is tapering off. The company’s revenue growth is expected to come down on a quarter over quarter basis in the fourth quarter.
Also, analysts expect the company’s revenue growth to fall to 1.3% in 2021, from the expected growth of 18.2% in 2020. If analysts’ forecasts are correct then it would be the slowest growth that Home Depot has reported in a long time. That said, the slower expected growth in 2021 is also because of the carry-forward demand that we saw in 2020.
Home Depot’s growth rates are expected to come down
Slower revenue growth is also expected to be reflected in Home Depot’s bottomline and its adjusted earnings are forecast to rise by only 3.2% in 2021 from the 13.8% growth that analysts are projecting for 2020. We’ll get more details on Home Depot’s growth outlook during the company’s fourth-quarter earnings call.
However, in all probability, the company will not be able to repeat the stellar performance witnessed in 2020. Meanwhile, competitor Walmart also expects its earnings and revenues to fall in the current year.
On the other hand, revenues for ecommerce companies is expected to continue growing at a fast pace, albeit at a slower pace than 2020. For instance, analysts expect Amazon’s revenues to rise by 22.5% in 2021—down from the 37.6% growth it reported in 2020.
What’re analysts forecasting for Home Deport shares?
According to the estimates compiled by MarketBeat, Home Depot shares have an average price target of $294.49, which is a premium of 5.2% over the current price. Its highest price target is $350, while $215 is the lowest price target.
Of the 30 analysts covering Home Depot shares, one rates it as a strong buy while 24 rate it as a buy. The remaining five analysts rate it as a hold or some equivalent. None of the analysts has a sell rating on the shares.
Looking at the recent analyst action, earlier this month, Zelman & Associated upgraded Home Depot shares from a hold to buy. Last month Guggenheim also upgraded the company, from a neutral to buy and assigned a price target of $310.
Is slowing growth a worry? Credit Suisse disagrees
While Home Depot’s growth is slowing as the pandemic-driven boost fades, Credit Suisse, which has an outperform rating on the shares, is not too perturbed. Credit Suisse analyst Seth Sigman is positive on the shares over the next 12-18 months, as he sees a “multiyear home investment cycle continuing even in a Covid-recovery scenario.”
Along with Home Depot, Sigman is also positive about Lowe’s. Sigman believes that home improvement stocks “already seem to be pricing in a normalisation in residential investment, which we actually think is far out”.
He cites three reasons for his bullish thesis on home improvement stocks, where he is more bullish on Home Depot as compared to Lowe’s. Sigman points to an “unprecedented gap between strong housing demand vs. very low housing supply,” backlog of remodelling projects, and more wear and tear at homes as people are spending more time indoors.
Home Depot valuation
The strengthening housing market as well as the continued stimulus from the US government are also bullish drivers for home improvement companies. In addition, while year-on-year comparisons in 2021 as compared to 2020 will paint a slowing growth, the medium to long-term outlook for the sector looks positive.
Looking at valuation, Home Depot shares currently trade at an NTM (next-12 months) PE multiple of 24.2x, which is in line with its long-term average. While the company’s sales and earnings rose sharply in 2020, markets haven’t given it a valuation rerating as it was a one time boost and was not sustainable.
That said, looking at the strong momentum in the US housing market, Home Depot shares are reasonably valued. The NTM P/E multiple peaked at 28.6x in August 2020 and has since come down.
Should you buy Home Depot shares?
Home Depot looks like a good share to buy and hold for the long term. The share offers a dividend yield of 2.1%, which is reasonable and higher than the S&P 500’s dividend yield. The shares are trading slightly above their 200-day SMA (simple moving average) and 50-day SMA. The 50-day SMA has been a strong support line for the stock.
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