Key points
- Home Depot had a sluggish quarter and provided weak guidance, setting it up for a correction.
- A move below critical support targets would bring the stock back into a trading range that has dominated conditions for two years.
- Returns on capital are reliable. The dividend has increased, but share buybacks may slow in 2024.
- 5 stocks we like better than Home Depot
Investors hope to see Home Depot New York Stock Exchange: HD The stock price rally in 2024 may have to wait until later for that to happen. As bullish as the recent breakout was, the pattern that followed is a rising wedge, and now the market is breaking down. Fourth quarter results and guidance are mixed. The company is not in danger of crumbling and the return on capital is reliable, but weakness is creeping into the picture for 2024 and the forecast could be optimistic. The bottom line is that Home Depot will likely break below critical support and return to a trading range that could dominate price action for the next few quarters.
A rising wedge is a price pattern that forms in an uptrend where rising highs and lows converge towards a point. The market appears to be trending higher, but has become overextended and is ripe for a reversal. Stock prices tend to correct from the peak, as the Home Depot market is doing now; the depth of the correction depends on numerous factors. Home Depot price action may still find support above the critical level, recently broken resistance, but the level will likely be tested for support.
Home Depot had a decent fourth quarter and provides weak guidance
Home Depot reported an overall decent fourth quarter, but the data shows that the core business continues to weaken and the outlook is not encouraging. The company reported net revenue of $34.79 billion, down 2.9% from last year. Revenue beats Marketbeat.com’s consensus estimate by a very narrow margin, which isn’t enough to offset other details. Comps fell 3.5%, with the United States leading the way. US comps fell 4%, with tickets and transactions at alarming levels. Settlements are declining for the fifth consecutive quarter and are accelerating, with ticket counts at a two-year low and transaction sizes at a multi-year low.
Margin news is equally mixed, beating consensus but down from last year. The result is GAAP EPS of $2.82, down 14.5% despite outperformance of $0.04. The worst news is yet to come. The company is targeting tepid 1% growth in 2024 and may be overestimating the market. The 1% includes an additional 53rd week, which brings the comp to -1%, and the EPS decline will be deeper. Both revenues and earnings are guided below consensus and are causing the market to revise its expectations for the stock price and the retail sector.
Capital return prospects could weigh on price action
Capital returns, including dividends and share repurchases, support Home Depot’s price action somewhat. Dividends total about 2.45% annually, with the 7.7% increase issued in the first quarter, and buybacks reduced the share count by 2.4% in 2023. Both are expected to continue into 2024, but the Buyback activity may slow due to slowdown in business. This and the above-average 24X earnings multiple have led the stock into weakness.
Analysts may also evaluate the stock later in the quarter. Analysts rate the stock a Moderate Buy consensus and have increased their price targets, but the average target lags the market. Suppose analysts stop revising their estimates upwards or start downgrading them. If that happens, Home Depot will have a hard time advancing from current levels as investors reset their expectations to match.
The technical outlook: Home Depot is at risk of a deeper dive
Home Depot’s price action fell more than 1% following the release. It shows support at the 30-day EMA, but there is a danger that it will break down. The MACD and Stochastic are weakening and showing weakness in a bull market. A move below the 30-day EMA would invite more bearish activity and could push the market towards firmer support levels. The best target for solid support is near $345; a move below would bring the market back into its trading range with a high probability of hitting the lower end of the range before the middle of the year.
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