The Home Depot Inc. (HD, Financial) is known as the largest home improvement retailer in the United States. The stock has outperformed the S&P 500 with a lower risk profile year to date, but I think the pendulum may be about to swing.
Earnings
The company managed to beat its second-quarter revenue and earnings per share estimates, but there are concerns as comparable store sales came in light at a 4.5% increase, missing the consensus of 5.61% growth. Furthermore, the gross margin rate was down by 80 basis points, while the number of customer transactions also decreased by 5.8% year over year.
I anticipate consumer utility to draw down toward the end of the year and into 2022, and disposable income has decreased and will decrease even further with potential asset tapering next year.
Home Depot does have a solid market position, but I just don't think retail stocks will ascertain their current levels in general.
Poor value
The stock has gained a tremendous 33.65% year to date, which is 15% more than the S&P 500. This is unrealistic in my opinion as the stock has a beta of only 0.99, which means it's likely to be less volatile than the benchmark index even during a cyclical upswing.
Home Depot's key metrics are all over the place and significantly elevated. The stock's price-earnings ratio is 8.68% higher than its five-year average, while its price-earnings to growth ratio of 0.83 suggests the company's growth to stock growth is 64.19% worse than its five-year average.
Furthermore, Home Depot's price-sales and price-cash flow ratios are trading above five-year averages by 21.18% and 54.07%.
Although these ratios aren't always mean-reverting, they're significantly elevated considering the acceptable thresholds for a company's financial statements with the characteristics of Home Depot's.
Dividends are at capacity
The stock's dividend yield stands at 1.86%, which is respectable. My concern lies in its remaining capacity. Compared to its five-year averages, its cash payout and dividend coverage are above their thresholds by 34.56% and 7.87%, indicating that further increases in dividend payouts are unlikely.
Final word
Home Depot was an outstanding stock to own back in January, but it's lost its appeal as both a dividend and capital gains prospect due to an overcooked market and a changing economy.
