Analyst who predicted Home Depot's rally has a new price target

Here's what could happen to Home Depot's stock next.

Jan 23, 2024 - 20:30

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Analyst who predicted Home Depot's rally has a new price target

Home Depot stock has performed nicely since October on optimism that the Federal Reserve would cut interest rates this year, thus sparking homebuying activity and interest in do-it-yourself home-improvement projects.

The rally likely surprised many. Last summer, worry about a recession and concern that sticky inflation would keep rates high were common, leading many to guess that mortgage rates would continue to climb even after they reached 8% in September.

Oppenheimer's Brian Nagel, who is rated five stars by TipRanks, wasn't caught flatfooted. Nagel recommended buying Home Depot stock throughout 2023, including in mid-November, when he reiterated his bullish outlook. Since then, its shares have risen nearly 20%.

Nagle's prescient prediction suggests that investors may want to pay attention to what he thinks could happen to Home Depot shares next.

A Home Depot analyst has changed his rating on its stock and set a new price target.
Image source: Shutterstock

Home Depot battles economic headwinds

Home Depot's business relies heavily on contractors purchasing materials for renovations and additions and on individuals who aren't afraid to work on their homes to earn a little sweat equity.

Business boomed in 2021 and 2022, but the-home improvement retailer's sales have slowed in the past year and profitability has suffered.

Unemployment remains low but wages are growing more slowly. Fewer jobs are open now than in 2021 and many companies have cut people, increasing workers' insecurity.

As a result, household budgets are being strained by inflation, and rising mortgage- and home-equity-loan rates have forced many to shelve their home-makeover plans.

Unsurprisingly, Home Depot's financials have taken a hit as consumers rethink their priorities.

Revenue has fallen for three consecutive quarters, including in the fiscal third quarter ended in October, when sales slipped 3% to $38 billion. Theft and higher costs due to inflation crimped earnings, causing them to fall 10% to $3.81 a share in the quarter.

"The Fed definitely has a higher-for-longer monetary posture, and that's going to continue to pressure durable goods in financing or motivation for larger home-improvement projects," Home Depot's chief executive, Edward Decker, said during the company's earnings conference call.

Given the company's recent struggles, it's easy to understand why some investors disagreed with Nagle's bullish outlook.

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Home Depot gets a new price target

Last year Nagle was correct to bet on the home-improvement retailer, but his current outlook may not make many investors happy.

Instead of predicting further gains for Home Depot's stock, Nagle expects share prices to fall.

On Jan. 22 Nagle cut his Home Depot stock rating to market perform from outperform, essentially dropping it to a hold from a buy. He also reduced his price target to $345. Previously, he expected shares would reach $360, a target it achieved last week.

"Upcoming initial 2024 guidance from [Home Depot and Lowe's (LOW) - Get Free Report] could prove unfavorable catalysts for shares," said Nagel.

"Investors looking to play prospects for strengthening trends in the sector, and at HD and LOW, beginning later in 2024, are likely to be presented better entry points in coming weeks and months."

Nagle's concern regarding downbeat guidance comes as the National Association of Retailers says existing-home sales fell 6.2% year-over-year in December.

The 10-year Treasury note yield has increased to 4.11% from about 3.85% at the end of 2023. If that yield goes higher, it could cause mortgage rates to climb because many banks use it to set lending rates.

If Nagle is correct, then weakness could enable investors to buy Home Depot stock on sale — but they'll have to wait awhile.

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