Home Depot Is Turning the Corner. Time to Buy the Stock?

Home Depot (NYSE: HD) is one of the best-performing stocks of all time. Since the company's initial public offering (IPO) in 1981, its stock has grown from a small home improvement chain to one of the most valuable retailers in the world, pioneering a new retail model -- a big-box home improvement store.

Home Depot has thousands of stock-keeping units (SKUs) in its stores, making it difficult for smaller traditional hardware stores to compete, and its economies of scale help keep prices low. The company has also invested in technology to support convenient options, like e-commerce and in-store pickup, differentiating itself that way as well.

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With the slowdown in the housing market, Home Depot has struggled over the last few years, but it had good news to report on Tuesday. This sent the stock higher on a day when the market was down broadly on a weak consumer-confidence report.

Home Depot returned to comparable sales growth, a key inflection point, as overall comps rose 0.8% in the quarter and U.S. comps were up 1.3%. Overall revenue was up 14.1% to $39.7 billion, benefiting from an extra week in the quarter and the acquisition early last year of SRS Distribution, the building materials supply company. That revenue figure beat estimates of $39.07 billion.

Adjusted earnings per share rose from $2.86 to $3.13, ahead of the consensus of $3.04. Without the benefit of the extra week, earnings per share (EPS) would have been $2.83.

Image source: Home Depot.

What to expect in 2025

Home Depot sees macroeconomic conditions holding steady, though the reversal to positive comparable-sales growth is a sign that the worst of the headwinds from the housing slowdown are behind it now. The company is still seeing sluggish demand for larger projects but noted a modest increase in cash-out refinances and draws on home equity lines of credit (HELOCs), a good sign for increased spending on home improvement. Americans are sitting on record levels of home equity and likely to tap that eventually, though it may require interest rates to come down.

The company's guidance called for comparable-sales growth of 1% and total sales growth of 2.8%, reflecting some benefit from SRS Distribution. It also sees adjusted earnings per share falling 2% to $15.24, which reflects investments in the business. It also shows the impact of SRS Distribution, which is a lower-margin business, on the company's overall profitability.

SRS continues to look like a winner

Nearly a year ago, Home Depot made a bold move in acquiring SRS Distribution, a leading distributor of building supplies, for $18.25 billion. The acquisition expanded Home Depot's addressable market, gave it nearly 1,000 building-supply outlets around the country, and strengthened its relationship with the pro customer, which has been a traditional advantage over chief rival Lowe's. The SRS acquisition also gives Home Depot cross-sell opportunities, and it's already rolled out QuoteCenter, a real-time price-quoting platform, on SRS in a number of new markets, driving sales growth.

In 2025, Home Depot expects SRS Distribution to outperform the core business, with mid-single-digit organic sales growth. SRS Distribution, which has continued to operate under the same management team, is also making acquisitions of its own, completing four tuck-in acquisitions since Home Depot acquired it.

Is Home Depot a buy?

As the company's guidance indicates, investors shouldn't expect any fireworks from Home Depot this year. The macro environment remains challenging, and the business is mature. The company just issued a 2.2% dividend hike, a modest increase reflecting the company's conservative forecast for earnings growth.

While 2025 might not be a big year for Home Depot, long-term tailwinds look more promising, as the housing shortage in the U.S. should eventually start to close with new home construction. Interest rates are expected to come down at some point in the future, as well, though that may not happen this year. Meanwhile, the company remains highly profitable and should return to buying back stock once it's finished paying off the debt from its acquisition of SRS.

Trading at a price-to-earnings ratio of 27, the stock isn't cheap, but that also seems like a reasonable price to pay for a category leader like Home Depot. For long-term investors, Home Depot stock still looks like a buy.

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Jeremy Bowman has positions in Home Depot. The Motley Fool has positions in and recommends Home Depot. The Motley Fool recommends Lowe's Companies. The Motley Fool has a disclosure policy.