Home Depot Core Strength Goes On Despite Cheaper Lumber, Bad Weather And China

Home Depot Inc HD rode a continuing strong home improvement market to a solid quarter, keeping analysts upbeat, but watching China and interest rates.

Home Depot’s second-quarter earnings beat Street expectations with margins and share repurchases giving it a boost, mitigating low lumber prices and some sluggishness from wet weather.

The Analysts

Wells Fargo’s Zachary Fadem reiterated an Outperform rating on Home Depot, raised the target price from $230 to $235.

Wedbush analyst Seth Basham remained Neutral on the stock but significantly raised the target price from $190 to $230.

KeyBanc’s Bradley Thomas kept a Sector Weight rating on the stock.

The results showed little evidence of a slowdown in underlying demand for home improvement items, Basham said.

Analysts noted that comparable sales pressures came not from underlying problems in the business, but lumber deflation., and core category growth remained solid.

Watching Macros

Several analysts said the company remains mostly at the mercy of macroeconomic trends.

“Should improving housing metrics persist on the back of lower interest rates and consumer confidence remain strong despite higher tariffs and stock market volatility, HD should be well positioned to capitalize,” Basham wrote in a note.

While Home Depot management reiterated its 2019 earnings guidance, it did lower sales guidance on deflation and tariff concerns. Basham noted, however, that consumers so far don’t seem to have changed their buying behavior due to tariff concerns.

Interest Rates Key

Thomas said he doesn’t see major risks from housing, but said “the key data to watch is how consumers react to lower mortgage rates.

“We remain concerned about moderating home price inflation and sluggish housing turnover, but are optimistic lower mortgage rates will stimulate demand, particularly in the context of a supportive consumer confidence and employment backdrop,” Thomas wrote in a note.

Fadem said the headwinds make the case for Home Depot even stronger because it appears to be overcoming them.

“We believe Q2 serves as an important reminder that HD remains among the best operators in retail, with impressive execution in a tough environment (lumber deflation, unfavorable weather, weaker category trends) and above consensus EBIT margins to boot,” Fadem wrote. “All in, we remain constructive on the 2H setup, with accelerating 2H comps, relatively manageable tariff exposure, and potential upside from housing improvement and margin flexibility.”