Is Home Depot a Buy After Its Latest Report?

Home Depot (NYSE:HD) came into its second-quarter earnings report on Tuesday, with investors hoping to see some signs of progress in a challenging macro environment, as the housing market has continued to struggle.

Against that backdrop, the leading home improvement retailer delivered solid results. In fact, the company reported its strongest comparable sales growth in nearly four years, with same-store sales up 1.7% globally and 1.3% in the U.S., which shows how difficult the environment has been, coming after the pandemic-driven boom in home-improvement spending.

Overall revenue rose 5.7% to $47.86 billion, easily beating estimates of $47.23 billion. Gross margin also improved to 33.7% from 33.4% in the quarter a year ago, though that was mostly due to a benefit from the IEEPA tariff refund. Without that, gross margin would have fallen due to higher fuel, energy, and product input costs. Selling, general, and administrative expenses as a percentage of revenue rose from 17.1% to 17.6%, and adjusted earnings per share rose from $4.68 to $4.92, which beat the consensus at $4.73.

The results were enough to send the stock up initially higher in trading on Tuesday morning, but the gains faded throughout the session.

Home Depot continued to see success in the DIY segment and in online sales, with digital comps up 11%, marking the fifth straight quarter of double-digit gains in that channel.

As in recent quarters, the company said smaller projects continued to drive demand, while customers delayed larger projects due to high interest rates and inflation, as well as the ongoing weakness in the housing market.

Home Depot reaffirmed its full-year guidance, calling for comp sales growth between flat and 2% and total revenue growth of 2.5%-4.5%, reflecting its acquisition of GMS, a specialty building-products distributor, to complement its earlier acquisition of SRS Distribution.

On the bottom line, Home Depot sees adjusted earnings-per-share growth of flat to 4%, or $14.69 to $15.28, which was in line with the consensus at $14.96.

Image source: Home Depot

Is Home Depot a buy now?

Home Depot's strongest comparable sales growth in nearly four years is a positive sign, and the company is gaining market share. Additionally, its strategy with SRS appears to be paying off as the company plans to add 40-50 new SRS branches in the quarter as it goes after the massive building supplies distribution market.

However, even as the business appears to be executing well, it's difficult for Home Depot to overcome the cyclical headwinds in the housing market, especially with 30-year interest rates now at the highest point they've been since 2007. Investors are anticipating at least one rate hike by the end of the year, which will continue to put pressure on mortgage rates and, in turn, the housing market.

Home Depot stock has traded sideways over the last five years, significantly underperforming the S&P 500, which has soared from the AI boom, and its earnings per share have fallen since then as well.

Based on its guidance, Home Depot trades at roughly 22 times this year's earnings, which is similar to the S&P 500.

Given that, Home Depot doesn't look like a buy right now, and won't be unless it gets much cheaper, or the housing market comes back to life. An S&P 500 index fund looks like a better option right now.

The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.