The Home Depot Inc. HD has maintained its leadership position in the home improvement market through ongoing investments in technology, digital capabilities and supply-chain efficiency. However, the company’s current forward 12-month price-to-earnings (P/E) multiple of 24.74X raises concerns about whether the stock's valuation is justified. This multiple is higher than the Zacks Retail – Home Furnishing industry average of 22.11X, making the stock appear relatively expensive.

The high price-to-sales (P/S) ratio of Home Depot, an Atlanta, GA-based home improvement retailer, adds to investor unease, especially considering its low Value Score of D, which suggests that it may not be a strong value proposition at current levels. The company has a forward 12-month P/S ratio of 2.28X compared with the industry’s 1.6X.

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Home Depot’s Premium Valuation Surpasses Peers

At 24.74X forward 12-month P/E, HD is trading at a valuation much higher than its competitors. Its competitors, such as Lowe’s Companies Inc. LOW, Ethan Allen Interiors Inc. ETD and Williams-Sonoma WSM, are delivering solid growth and trade at more reasonable multiples. LOW, ETD and WSM have forward 12-month P/E ratios of 19.52X, 11.15X and 21.87X — all lower than Home Depot. At such levels, HD’s stock valuation seems out of step with its growth trajectory.

The stock’s premium valuation suggests that investors have strong expectations for Home Depot’s growth potential. However, the stock currently seems somewhat overvalued. As a result, investors might be hesitant to buy at these elevated levels and prefer to wait for a more favorable entry point.

While HD’s share price has declined 9.5% in the past month, many investors are questioning whether the recent dip presents a buying opportunity. After the recent drop in share price, the Home Depot stock has underperformed the broader industry’s 8.5% decline. The stock also underperformed the Retail-Wholesale sector’s fall of 7.5% and the S&P 500’s decline of 5.1% in the same period.

HD Stock’s One-Month Price Performance

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Currently trading at $376.80, the stock reflects a 16.4% premium to its 52-week low mark of $323.77 and a 14.2% discount from its 52-week high of $439.37. The technical indicators show that the stock is trading below its 50-day and 200-day moving averages, indicating a bearish sentiment.

Home Depot Stock Trades Below 50-Day & 200-Day Moving Averages

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Understanding HD’s Growth Drivers Vs Ongoing Challenges

While investors may be concerned about Home Depot’s pricey valuation, its recent share price decline and ongoing initiatives show that the stock still attracts favorable sentiment. However, it is wise to closely evaluate whether the stock is worth buying at current prices.

HD remains confident in its strategic initiatives to drive business growth. The company continues to invest in creating a seamless, interconnected customer experience, enhancing the Pro wallet with its robust ecosystem, and expanding its store footprint. It also remains optimistic about the long-term prospects of the home improvement industry and its ability to capture a larger market share.

Its premium valuation reflects a strong commitment to customer service, catering to both DIY enthusiasts and professional (Pro) contractors. With an extensive store network, diverse product offerings and a growing digital presence, Home Depot effectively meets evolving consumer needs.

The company's "One Home Depot" strategy, supported by a solid technology infrastructure, has consistently boosted online engagement. Ongoing investments in the Pro ecosystem strengthen its position in the market.

Home Depot’s well-optimized inventory management, high employee engagement, and expanding e-commerce and home delivery services are expected to drive continued market share growth. The acquisition of SRS Distribution reinforces its leadership in building material distribution, enhancing services for professional contractors and tradespeople.

What’s Not Right With Home Depot?

HD, a leading force in the home improvement industry, continues to navigate challenges stemming from softened demand and pressure on discretionary, high-ticket categories. This ongoing weakness has weighed on the overall sales and comparable sales performances.

For fiscal 2025, management projects a 2.8% year-over-year sales increase, whereas it reported 4.5% sales growth in fiscal 2024. Comparable sales are expected to rise 1% for the 52 weeks of fiscal 2025. The company forecasts a flat gross margin of 33.4%, whereas the operating margin is projected at 13% and the adjusted operating margin is anticipated to be 13.4%, indicating slight declines from the fiscal 2024 reported levels.

In addition to softer consumer spending, elevated interest rates have posed profitability challenges. Home Depot's management noted that higher borrowing costs, which emerged in early 2024, are likely to persist, influencing consumer purchasing behavior and financial conditions.

Net interest expenses are expected to rise to $2.2 billion, up from $2.1 billion in fiscal 2024. As a result, Home Depot anticipates GAAP earnings per share to decline 3% year over year, with adjusted EPS falling 2%. Despite these headwinds, the company remains focused on long-term growth strategies to strengthen its market position.

HD’s Estimates Reflect Downtrend

Led by the cautious outlook, Home Depot’s estimates have shown a declining trend in the past 30 days. The Zacks Consensus Estimate for HD’s fiscal 2025 and 2026 earnings per share declined 3.4% and 2%, respectively, in the last 30 days. The downward revision in earnings estimates indicates that analysts are less confident about the company’s growth potential.

For fiscal 2025, the Zacks Consensus Estimate for HD’s sales implies 2.7% year-over-year growth, whereas the EPS estimate indicates a 1.1% year-over-year decline. The consensus mark for fiscal 2026 sales and earnings suggests 4.3% and 9.5% year-over-year growth, respectively.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

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Is the Slowdown in Home Depot Stock a Buy Opportunity?

HD’s premium valuation and cautious outlook raise valid concerns for investors. Though Home Depot's earnings guidance is somewhat disappointing, growth initiatives like the "One Home Depot" plan and strong Pro customer sales position it well for the long term. Also, the recent pullback in the HD stock offers a compelling buying opportunity for investors looking to participate in the retailer’s promising long-term growth.

However, some caution is warranted, given the prevailing headwinds, which call for a thorough evaluation of recent developments before making investment decisions. For current shareholders, retaining this Zacks Rank #3 (Hold) stock may prove advantageous in the long term. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

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Lowe's Companies, Inc. (LOW) : Free Stock Analysis Report

The Home Depot, Inc. (HD) : Free Stock Analysis Report

Williams-Sonoma, Inc. (WSM) : Free Stock Analysis Report

Ethan Allen Interiors Inc. (ETD) : Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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