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Home Depot: Why Did Guggenheim Downgrade the Stock?

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  • Guggenheim downgraded Home Depot stock to “neutral.”
  • The stock was trading lower this morning.

Lower outlook for Home Depot stock

On Tuesday, Guggenheim lowered its outlook on Home Depot (HD) stock. Due to pressure on sales and earnings from lumber price deflation and higher tariffs, Guggenheim downgraded the stock to “neutral.” During the company’s second-quarter conference call, it warned investors that lower lumber prices and increased tariffs might impact its sales and profitability.

Home Depot reduced its fiscal sales outlook due to the headwinds mentioned above. The company expects its revenues to increase 2.3% in fiscal 2019—down from the previous growth guidance of 3.3%. Meanwhile, the company’s comps will likely increase 4%—down from the previous outlook of 5% growth.

Home Depot reported a high single-digit decline in lumber comps during the second quarter. Lower lumber prices took a toll on the average ticket growth. Management stated that lower lumber prices had a negative impact on the average ticket growth by 110 basis points.

Besides deflation in lumber prices, higher tariffs will likely add a cost burden and impact consumer spending.

The company posted its second-quarter results on August 20. Overall, the company beat analysts’ estimate on the bottom-line front. However, the company’s sales didn’t meet the expectation. Home Depot posted and EPS $3.17, which beat analysts’ estimate of $3.08 by a wide margin. The company’s revenues rose 1.2% YoY to $30.8 billion but fell marginally short of analysts’ estimates. The comps rose 3.1% in the US.

Analysts’ recommendations 

Despite the lower guidance, Home Depot stock has risen 3.5% since its second-quarter earnings. The stock has risen 33.5% on a YTD (year-to-date) basis as of Monday. Lowe’s (LOW) shares have also marked healthy gains this year. Lowe’s stock has risen 21.9% YTD. The lower unemployment rate and higher wages are driving home retailers’ comps and stock prices.

Among the 34 analysts covering Home Depot stock, 21 recommend a “buy,” while 13 recommend a “hold.” Analysts have a target price of $225.85 on the stock, which is lower than its closing price of $230.99 on Monday. On September 13, Citigroup raised its target price on the stock to $269 from $246.

Home Depot stock was trading 1.5% lower this morning.

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