By Sam Boughedda
Raymond James analysts downgraded Home Depot (NYSE:HD) to Market Perform from Outperform without a price target in a note Wednesday following the company's earnings release.
The analysts told investors the firm is "taking a breather" on the stock and sees its risk-reward as more balanced.
"Our change in opinion is not a reflection of Home Depot's execution (has been solid), but more so our view that the risk/reward for HD entering 2023 now appears more balanced, with the ongoing risk/headwinds to the U.S. housing industry and the stock recovering nicely off its 2022 lows," wrote the analysts. "While we are not forecasting a significant correction in earnings (base case is up ~2% y/y), we are concerned that transactions could remain negative in 2023 (slow sequentially again versus 2019 base year), leading to comparable sales pressure, especially as inflation tailwinds to comps abate some (average ticket growth has been the recent driver of comps)."
The analysts also explained that any potential decrease in home prices could impact consumers' perceived return on investment in their homes following several years of record spending in the category.
"With HD now trading back at ~18x our forward EPS (up from ~16x, but admittedly still below its historical average of ~20x), we are placing our stock recommendation on the sidelines for now. On a long-term basis, we continue to believe HD is well suited to take further market share (~17% market share of a ~$900 billion TAM) and the company's cashflow generation and capital allocation remain strong," they concluded.
Home Depot shares are up 0.5% at the time of writing.