Why Home Depot Stock Dropped Today

Home Depot (NYSE: HD) stock tumbled 3.4% through 11:10 a.m. ET Tuesday morning after missing on earnings but beating on sales.

Analysts forecast the home improvement retailer would report a $3.83 per share Q3 profit on sales of $41.1 billion. Home Depot actually earned only $3.74 per share, adjusted for one-time items, although its sales were $41.4 billion.

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Home Depot Q3 earnings

Home Depot grew sales 2.8% year over year, but that modest news isn't even as good as it sounds. $900 million of the company's $1.1 billion increase in sales was inorganic growth, coming from HD's purchase of home construction materials distributor GMS Inc. in September. As for same-store sales growth, well, those increased only 0.2% -- and half of that growth happened outside the U.S.

Earnings, too, underwhelmed. Measured according to generally accepted accounting principles (GAAP), Home Depot earned only $3.62 per share in the quarter, down a nickel from last year's Q3.

CEO Ted Decker blamed a "lack of storms in the third quarter" for the miss -- which is curious coming from a retailer (retailers usually blame bad weather, not its absence, for poor results), as well as "consumer uncertainty and continued pressure in housing."

Is Home Depot stock a sell?

Home Depot says its sales will grow 3% this year, mostly thanks to GMS. And earnings will probably decline again despite the sales growth -- down as much as 6% from 2024, to roughly $14.01 per share.

On a $345 stock, that works out to about a 24.6 times price-to-earnings ratio, which may not sound too bad for a dominant force in home improvement. It's definitely not a cheap price, however, and especially un-cheap for a retailer whose profits are shrinking.

I'm a "sell" on Home Depot stock.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.