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

Home Depot reported its first-quarter earnings report on May 20. Here’s Morningstar’s take on Home Depot’s earnings and stock.

Key Morningstar Metrics for HD

• Fair Value Estimate: $308.00
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

What We Thought of Home Depot’s Earnings

Home Depot delivered first-quarter sales growth of 9.4%, buoyed by its acquisition of SRS Distribution, but same-store sales fell 0.3%, hurt by a 70-basis-point foreign-exchange headwind. Despite struggling home turnover, the firm held its full-year outlook for sales growth of 2.8% and adjusted EPS 2% lower.

Why it matters: Although housing supply has improved modestly to four months, existing home sales remain subdued, falling 2.4% in March. We don’t expect either turnover or demand to pick up materially over the next few quarters, keeping Home Depot’s sales growth subdued.

• Interest rates appear to be the limiting factor in housing transactions. Morningstar’s average annual 30-year mortgage rate forecast doesn’t fall below 6% until 2026 from 7% currently, when faster growth could again result in cost leverage.
• We think Home Depot will continue to take share in its markets, particularly across the professional segment, as cross-selling opportunities abound and SRS takes the lead on the firm’s trade credit program. This should support long-term average annual sales growth of 4%.

The bottom line: We don’t plan any material change to our $305 fair value estimate for Home Depot and view shares as rich at 26 times our 2025 EPS estimate. We believe the premium multiple awarded to the best-in-class retailer is outsize to the 6% EPS growth we model over the next five years.

• We view the firm’s commitment to its everyday low-price strategy, which should continue to uplift the brand, as a key tenet underlying our wide moat rating. The pass-through of savings to consumers will hold our gross margin outlook to around 33.5% over the next decade.
• The firm’s scale has helped it maintain its 2025 outlook, as sourcing diversification and negotiating leverage should help the adjusted operating margin reach 13.4%, down just 10 basis points despite tariffs. Fortunately, more than 50% of Home Depot’s products are sourced in the US.

Fair Value Estimate for Home Depot

With its 2-star rating, we believe Home Depot stock is overvalued compared with our long-term fair value estimate of $308 per share, an increase from $305 after the first quarter to incorporate time value.

The company posted first-quarter revenue growth of 9.4%, to $39.9 billion, and a same-store sales contraction of 0.2%. However, DIY consumers continue to feel pressure from high interest rates and macroeconomic uncertainty, resulting in management maintaining its fiscal 2025 guidance of 1%-3% total sales growth, with comparable sales growing just 1%. We expect low housing turnover and macro uncertainty to persist in 2025 and will continue to weigh on DIY performance, as potential buyers wait for mortgage rates to come down.

Our long-term outlook remains unchanged. Given the maturity of the domestic home improvement industry, we expect demand to largely depend on changes in the real estate market, driven by prices, interest rates, turnover, and lending standards. We project 4% average sales growth over the next decade after housing market stabilization boosts DIY spending back to historical levels, supported by 3.3% average same-store sales increases and helped by offerings like buy online/pick up in-store and better merchandising, which drives market share gains. In the longer term, we forecast gross margins to hold steady over the next decade (ending 2034 at around 34%), while the SG&A expense ratio remains flat (around 18% on average) as the firm capitalizes on its scale and supply chain improvement initiatives while investing to protect its market leadership perspective. This leads to a terminal operating margin of 14.6%, in line with its prepandemic peak.

Read more about Home Depot’s fair value estimate.

Economic Moat Rating

We assign Home Depot a wide economic moat. We believe that Home Depot, as the largest global home improvement retailer, possesses a competitive edge owing to its brand intangible asset and cost advantage. Over the past 10 years, Home Depot’s sales growth has outpaced the building materials and garden equipment and supplies dealer industry’s average growth of 5.4% by 150 basis points annually (based on the US Census Bureau data), an indication of the brand’s ongoing relevance.

We surmise Home Depot’s strong brand equity and extensive scale should enable incremental market share gains in a highly fragmented $1 trillion North American home improvement market, on top of the nearly 16% market share it has amassed thus far (given more than $159 billion in sales in 2024).

Read more about Home Depot’s economic moat.

Financial Strength

Home Depot has had no concerns tapping the credit markets to finance the business in recent years. The firm was able to raise $10 billion in debt during the first half of 2024 in order to finance part of the $18.25 billion of SRS Distribution acquisition. This left Home Depot with a total debt above $53 billion at the end of 2024.

Management has halted share repurchases with higher expected debt service as a result of the SRS acquisition; however, we model share repurchases to resume in 2026 and beyond, with the new $15 billion share repurchase program authorized in August 2023. Including the impact of the SRS acquisition, EBIT is forecast to cover the net interest expense 10 times at the end of 2025.

Read more about Home Depot’s financial strength.

Risk and Uncertainty

We give the company a Low Morningstar Uncertainty Rating owing to its strong brand recognition, which has helped stabilize sales through the cycle. Home Depot’s sales are largely driven by greater consumer willingness to spend on category goods in both necessary and discriminatory home purchases. Thanks to the maintenance, repair, and operations (MRO) and pro-business (HD Supply and SRS), revenue could be less cyclical, as the maintenance side of the business can prove more consistent.

In uncertain economic times, consumers remain in their homes, embarking on improvement projects, boosting do-it-yourself revenue. Alternatively, when home prices rise, the wealth effect generates a psychological boost to consumers, reinvigorating professional sales thanks to a higher willingness to spend on big home improvement projects.

We believe the most significant near-term risks are a continuation of slow turnover in the real estate market and potential tariff impacts. Low home inventories for sale remain problematic, aggravated by higher mortgage rates (which remain near 7% in May 2025).

Read more about Home Depot’s risk and uncertainty.

HD Bulls Say

• Home Depot’s continued investments in supply chain and merchandising should improve productivity and support its market leadership position in the home improvement market.
• The firm has returned $73 billion to its shareholders through dividends and share buybacks over the past five years, nearly 20% of its market cap. We forecast Home Depot returning around $77 billion to owners over the next five years.
• The addressable MRO market is about $150 billion. As Interline and HD Supply make up a low-double-digit share, and SRS reaches a new end user, there is share up for grabs.

HD Bears Say

• Weak consumer spending, higher interest rates, or an economic downturn could hinder sales for home improvement projects and affect Home Depot’s growth.
• IT and supply chain improvement gains could prove more challenging to achieve, as simpler efforts have already borne fruit. Further productivity efforts could face some implementation risks, creating inconsistent profitability.
• As home improvement demand continues to normalize, consumers could continue to shift discretionary spending away from home improvements and allocate more income into other discretionary categories.

This article was compiled by Gautami Thombare.