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Why Analysts Cut the Price Target on Home Depot Stock

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Home Depot (HD) stock fell 5.4% on Tuesday after the company posted lower-than-expected sales for the third quarter. Moreover, Home Depot cut its sales outlook for the second time, which further irked investors as well as analysts.

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Home Depot stock: Analysts reduce price target

Several analysts reduced their price targets on Home Depot stock following its lower sales outlook. However, most of them maintained their ratings on HD stock. Analysts made the following downward revisions in its price target:

  • Piper Jaffray lowered the price target to $240 from $242 but maintained a “neutral” rating.
  • RBC cut the price target to $246 from $253 with an “outperform” rating.
  • J.P. Morgan cut the price target to $252 but maintained an “overweight” rating.
  • Jefferies lowered the price target to $263 from $268 with a “buy” rating.
  • Instinet cut the price target to $237 from $240.

Analysts have an average price target of $237.86 on Home Depot stock, which implies an upside of about 5% based on its closing price of $225.86 on November 19.

Twenty out of 34 analysts suggested a “buy” on HD stock. Furthermore, 13 analysts suggested a “hold,” and one analyst maintained a “sell” rating.

Revisiting HD’s Q3 earnings

Home Depot’s third-quarter revenues of $27.22 billion rose 3.5% YoY (year-over-year), thanks to the improved comps across all geographies. However, revenues fell short of Wall Street’s expectation of $27.53 billion due to weakness in lumber and electrical.

Home Depot’s comps rose 3.6%, which also fell short of analysts’ consensus estimate of 4.7% growth. Comps in the US increased by 3.8%. Lower lumber prices negatively affected its comps growth by 65 basis points in the third quarter.

Notably, big-ticket items continue to grow at a healthy rate (up 4.8% in the third quarter), representing 20% of its total US revenues.

Management expects a delay in realizing the benefits from its strategic investments, which is likely to affect sales growth in 2019. Further, deflation in lumber is pressuring the company’s top line. Management cut its sales growth guidance once again this year.

Home Depot now expects its net sales to mark 1.8% growth in 2019. Earlier, Home Depot forecast 2.3% growth in net sales. Also, the company now expects comps to increase by 3.5%, down from its previous growth guidance of 4.0%.

During its second-quarter conference call, Home Depot lowered its sales growth outlook for the first time. Home Depot cut the sales growth guidance to 2.3% from 3.3%. Moreover, its comps growth outlook was reduced to 4% from 5%.

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