After Earnings, Is Home Depot Stock a Buy, a Sell, or Fairly Valued?

Home Depot released its second-quarter earnings report on Aug. 18. Here’s Morningstar’s take on Home Depot’s earnings and stock.

Key Morningstar Metrics for Home Depot

• Fair Value Estimate
  : $325.00
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Home Depot’s Q2 Earnings

Home Depot’s second-quarter sales grew 5.7%, helped by 1.7% same-store sales growth, the Gypsum Management & Supply acquisition, and new distribution branches. The adjusted operating margin of 14.7% (down 10 basis points) was hurt by higher costs, partially offset by $685 million in tariff refunds.

Why it matters: Organic growth is elusive as the housing market remains stalled. Over the past five years, the monthly mortgage payment for a median US home has risen by around $1,000, more than half of which is due to higher financing costs. This has led to lower turnover and home improvement spending.

• Still, Home Depot’s ability to merchandise for both DIY and pro customers has allowed it to capture increased market share, since industrywide, building material and garden equipment and supplies dealers’ retail sales rose less than 1% over the past three months.
• We think investments to raise brand awareness, including the launches of express delivery (three hours) and Magic Apron (artificial intelligence tool), as well as exclusive launches (USG, Ruco), support ticket growth (2.8%) via pricing strategies and lead to customer stickiness.

The bottom line: We see no major change to our $325 fair value estimate for wide-moat Home Depot and see shares as fairly valued. We think fear of more interest rate hikes by the Federal Reserve, which could crimp housing demand, might plague the near term.

• Although the firm will see a $730 million gross margin aid in 2026 from tariff refunds, it held its 33.1% margin outlook. Upside is bound by inflation (fuel, energy, input costs) and a negative mix from the GMS tie-up. In turn, the 2026 adjusted operating margin is set to drop only 20 basis points.
• We don’t believe big-ticket projects will be pressured in perpetuity, and that when such undertakings resume, Home Depot should be able to capture 4% same-store sales growth (including SRS). As such, costs should lever again, driving operating margin back to nearly 15%.

The following are excerpts from Morningstar’s company report on Home Depot.

Fair Value Estimate for Home Depot

With its 3-star rating, we believe Home Depot’s stock is fairly valued compared with our long-term fair value estimate of $325. Despite incorporating second-quarter results (same-store sales growth of 1.7% and adjusted EPS of $4.92) that were slightly better than our expectations, we are largely maintaining our 2026 outlook. The firm reiterated its 2026 forecast, which included 2.5%-4.5% sales growth, an adjusted operating margin of 12.8%-13.0%, and EPS growth of flat to 4.0%.

Our updated forecast includes 4.2% sales growth (from 3.9% prior) and 2.1% EPS growth (1.5% prior) in fiscal 2026, along with a 12.9% adjusted operating margin (up 10 basis points). Given the maturity of the domestic home improvement industry, we expect total demand to largely depend on changes in the real estate market, driven by prices, interest rates, turnover, and lending standards.

Read more about Home Depot’s fair value estimate.

Economic Moat Rating

Home Depot earns a wide moat thanks to its brand strength and cost advantage as the world’s largest home improvement retailer. With midteens market share in a fragmented $1.2 trillion North American home improvement market (supported by roughly $172 billion in expected 2026 sales), we expect its brand equity and scale to drive continued share gains. Additionally, we think Home Depot’s emphasis on top-notch customer service further supports its brand intangible asset.

Home Depot’s position is hard to disrupt. Smaller retailers lack the scale to build vendor relationships strong enough to challenge its pricing power, and manufacturers are unlikely to succeed by creating their own retail networks; they move more volume by partnering with a wholesale channel like Home Depot. This advantage supports long-term returns. We expect return on invested capital to remain above the 7.5% cost of capital for the next two decades, ultimately reaching 23.0% by 2035, reinforcing the company’s wide moat.

Read more about Home Depot’s economic moat.

Financial Strength

Home Depot has had no concerns with tapping the credit markets to finance the business in recent years. As a result of higher leverage from the SRS acquisition, management has halted share repurchases; however, we model share repurchases to resume in 2027, as Home Depot works its leverage metrics back toward 2 times after digesting the GMS and Mingledorff’s transactions. Including the impact of recent acquisitions, EBIT is forecast to cover the net interest expense 9 times at the end of 2026.

Free cash flow to the firm has averaged about 5% of sales over the past three years, supporting higher leverage, and we expect the company will stay within its targeted adjusted debt/EBITDAR metric of 2 times over the long term. The balance sheet’s $28 billion in net property, plant, and equipment provides an asset base to secure debt if necessary.

Given Home Depot’s ability to generate tremendous free cash flow to the firm (we forecast an average of $20 billion in 2026-35), we expect management will have no problem facilitating dividend payments and remaining at or above its long-term dividend payout ratio target of 55%.

Read more about Home Depot’s financial strength.

Risk and Uncertainty

We give the company a Medium Uncertainty Rating, owing to its strong brand recognition, which has helped stabilize sales through the cycle. Although new competitors could set up shop on Home Depot’s turf, we think new players would be hard-pressed to offer similarly competitive product prices, as they likely wouldn’t have vendor relationships of the same magnitude.

In our opinion, Home Depot has minimal environmental, social, and governance risk. Product sourcing, potential data theft, and consumers’ shift in preferences to sustainable product offerings are relevant, but Home Depot should be able to adapt, and we do not see any material financial impact from these factors.

We believe the most significant near-term risks are continued slow turnover in the real estate market and potential tariff impacts. Low home inventories for sale remain problematic, aggravated by higher-than-optimal mortgage rates (a 30-year loan remained near 6.7% in mid-August 2026).

Read more about Home Depot’s risk and uncertainty.

HD Bulls Say

• Home Depot’s continued investments in logistics and merchandising should improve productivity and support its leadership position in the home improvement market.
• The firm has returned $71 billion to its shareholders through dividends and share buybacks over the past five years, more than 20% of its market cap. We forecast Home Depot will return another $65 billion to owners over the next five years.
• The large professional market is $300 billion. As Interline and HD Supply make up a low-double-digit share, SRS reaches these specialists, and GMS joins the mix, share is up for grabs.

HD Bears Say

• Weak consumer spending, perpetually higher interest rates, or an economic downturn could stall demand for home improvement projects and affect Home Depot’s growth.
• Productivity improvement gains could prove more challenging to achieve, as simpler efforts have already borne fruit. New initiatives could face some implementation risks, creating inconsistent profitability.
• As Home Depot digests more than one sizable acquisition, integration risk remains, and management could be distracted by idiosyncratic issues at larger tie-ups like SRS or GMS.

This article was compiled by Irza Waraich.