Home Depot Inc Stock Is a Buy, But Hurricanes Have Little to Do With It
A couple of months ago I managed to ruffle more than a few feathers by suggesting Home Depot Inc (NYSE:HD) wasn’t likely to benefit — on a net basis — too much despite a couple of hurricanes barreling through the southeastern part of the United States. That wasn’t to suggest HD stock wasn’t worth owning. It was simply to say if the only reason an investor wanted to own the stock was to capitalize on hurricane-driven demand, that wasn’t good enough.
Source: Mike Mozart via Flickr (Modified)
The same day, I said the same thing about rival Lowe’s Companies, Inc. (NYSE:LOW), pointing out that history just didn’t indicate major storms did either company as much good as presumed.
Then, earlier this week, Home Depot posted its third-quarter numbers. They were great, which some people quickly touted as vindication for making the event-minded trade. The home improvement retailer even made a point of saying the pair of storms drove some business its way. When you take a closer look at all the numbers and undertows though, you’ll still find it’s something else driving the sales growth Home Depot is enjoying.
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Home Depot Loves the Bigger Undertow
The good news: Last quarter’s top line of $25.03 billion was 8% better than the year-ago total of $23.2 billion. The surprising news: Of the $1.88 billion year-over-year increase in sales, only $282 million (or 15%) of it stemmed from hurricane preparation and repair.
So yes, hurricanes Irma and Harvey provided something of a (no pun intended) tailwind, though not one that jibed with the bullish table-pounding from September. And curiously, despite the bullish certainty that Home Depot and Lowe’s would both thrive thanks to two devastating storms, Home Depot actually saw more of a financial benefit from hurricanes Irene and Sandy in 2012. The retailer did $377 million in additional, storm-spurred sales then.
It’s not a bad thing. In fact, it’s a good thing … particularly if you’re an HD stock owner. While home repairs and damage-prevention can create new business, it’s not a reliable source of revenue, and yours truly here still contends that hurricanes can temporarily or even permanently shut down businesses that would have otherwise brought business to Home Depot.
Then why, pray tell, was the company able to up its full-year sales growth outlook to 6.3%? For the obvious reasons — home improvement, hardware and even homebuilding remain a red-hot business.
The proof is in the overarching trends, like the ongoing increase in home prices … a rally that got started back in 2012 and hasn’t stopped to look back once; the Case-Shiller and the FHFA data are in agreement here.
Then there’s the nation’s housing starts and building permits data, which had slowed down this year, and was more or less stopped in September when bad weather put many would-be new homes on hold. The data isn’t moving backwards though, and once the post-hurricane repairs move into full swing, these numbers could perk up as well.
Then there’s the incredible advance of new home sales, which had tapered this summer but surged in September to put the bigger trend back in place. Also note that while demand for new homes is strong, there’s still a relatively limited supply of them (and a bunch of them were taken off the market in September). Home Depot still hasn’t seen homebuilding demand at its peak potential yet.
In this light, something Home Depot’s CFO Carol Tome said during the earnings conference call is much easier to digest now: “As we think about housing broadly and fears of slowdown, we don’t see that for 2018, 2019 and 2020.”
Bottom Line for HD Stock
Point being, while the hurricane shtick makes for great headlines, it’s largely irrelevant to true long-term shareholders (for better or worse). The Home Depot story is one founded on much bigger matters. That’s why traders may want to worry less about event-driven possibilities and more about aforementioned data like home prices and construction activity. Hurricanes can’t overcome a weak home improvement and homebuilding market, and a lack of hurricanes can’t crimp a strong home improvement and homebuilding market.
And right now, owners of HD stock can be excited about the bigger-picture trend that’s doing much more for the company than any hurricane season ever could.
Keep your eyes on the more meaningful matters.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
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