The Ratings Game: Home Depot could feel housing industry headwinds, analysts say

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Home Depot Inc., which extended its streak of earnings beats on Tuesday, could feel the impact of housing industry pressures, according to analysts.

Raymond James downgraded the home improvement retailer to market perform from outperform on Wednesday, citing headwinds to the U.S. housing industry and comparable sales pressure.

Any potential decrease in home prices could hinder consumers’ perceived return on investment in their homes following several years of record spending in that category, according to Raymond James analyst Bobby Griffin, in a note. To illustrate his point, Griffin pointed to a recent Raymond James report that lowered ratings on home builders KB Home KBH, -1.27%, Lennar Corp. LEN, -1.31%, M.D.C Holdings Inc. MDC, -1.47%, PulteGroup Inc. PHM, -0.73%, Toll Brothers Inc. TOL, -0.88% and D.R. Horton Inc. DHI, -1.15%.

But the analyst notes that Home Depot Inc.’s HD, -1.04% stock has “recovered nicely” off its 2022 lows and the company is executing well.

Home Depot bounces back up after earnings beat, inventory improvement offsets implied growth slowdown

“Our change in opinion is not a reflection of Home Depot’s execution (has been solid), but more so our view that the risk/reward for HD entering 2023 now appears more balanced,” wrote Griffin, in the note. “We are concerned that transactions could remain negative in 2023 (slow sequentially again versus 2019 base year), leading to comparable sales pressure, especially as inflation tailwinds to comps abate some.”

Boosted by the third-quarter results, Home Depot’s stock ended Tuesday’s session up 1.6%, outpacing the S&P 500 Index’s SPX, -0.63% gain of 0.9%. The company’s stock has fallen 24.8% this year, compared with the S&P 500 Index’s decline of 16.3%.

Wedbush also sees potential for housing industry pressure, despite Home Depot’s confidence in its ability to gain share. “We see likelihood for housing-related headwinds on the back of sharply rising mortgage rates, and as housing unit sales continue to decline sharply and home prices decline,” wrote Wedbush analyst Seth Basham, in a note released Wednesday. “These pressures are unlikely to be fully offset by high levels of home equity given sharp levels of home price appreciation throughout the pandemic and the fact that homeowners that have low mortgage rates locked in and are more likely to stay in place and remodel their homes.”

The analyst firm maintained its neutral rating and $280 price target for Home Depot.

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Decelerating home price appreciation is a concern, according to D.A. Davidson, which has a neutral rating and a $334 price target for Home Depot. “We think there is some merit to the idea that with mortgage rates high, homeowners are more likely to stay in place than move in the current environment, and that could lead to more spending on their existing assets,” wrote D.A. Davidson analyst Michael Baker, in a note released Tuesday. “But, that being said, home price appreciation has always been the bigger driver to home-related spending.”

“So to the extent that housing market weakness leads to decelerating growth in this metric, or even declines, we see that as a risk,” he added.

Of 35 analysts surveyed by FactSet, 22 have an overweight or buy rating, 12 have a hold rating and one has an underweight rating for Home Depot.

This article was originally published by Marketwatch.com. Read the original article here.

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