The Green Shoots in Home Depot’s Earnings

0:01Tyler Crowe:Home Depot and housing on today's Motley Fool Hidden Gems Investing.

0:09Tyler Crowe:Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by the usual Tuesday crew. I've got Lou Whiteman and Matt Frankel, longtime Fool contributors here today. We're going to get into Home Depot's earnings, which reported before the bell today, as well as take a look at, I would say, like a broader look at the housing industry in general, residential construction, building supply companies in general, because Home Depot is a great time to expand on this broader world that we see in the housing world, because there are trillions of dollars associated with a lot of financing opportunities.

0:43Tyler Crowe:And of course, when we finish up, we'll get into the mailbag. But as I said, we're going to start with Home Depot's earnings. Shares are down about 1.37 % as we tape after the company released its first quarter earnings. It beat earnings and revenue estimates were better than expected. Revenue was up 4.8 % year over year, but costs outpaced that and earnings ended up doing a 4.3 % decline on a per share basis. And S &P 500 is down today. So you could say, yeah, it's just the market, I guess. It's not a big deal. But other than that, guys, what did you see maybe in the earnings or perhaps what you've been watching with Home Depot in general?

1:23Tyler Crowe:And what were some of the takeaways? Lou, I want to start with you.

1:26Lou Whiteman:Yeah. So down slightly now, half hour ago, I think it was 0.1 % or so. So I think the market is yawning at this quarter, which if we're honest, that's probably the right reaction. And you don't have to overreact every three months. But look, I will tell you, if you squint, if you really, really look carefully, if you really want to see it, there are green shoots there. There is potential signs of life here in a company that, you know, it's been a bad few years forged in terms of total spend. People are shopping less, but they are spending more. Average ticket increased by 2.2%, even as transactions declined by 1.3%, and purchases of$1 ,000 or more were up slightly.

2:09Lou Whiteman:Now, look, it could be glass and fancy. That's just the impact of inflation versus people actually having an interest in bigger projects. But there's at least a glimmer of hope that we're not just buying petunias for the spring, that we're actually investing in our homes and doing bigger projects, which we haven't seen before.

2:28Tyler Crowe:Lou, I didn't realize you were a big petunia guy.

2:31Lou Whiteman:You know what, the squirrels like the roots, so you have to be careful with them.

2:36Tyler Crowe:Matt, what did you see when you looked at the earnings? Yeah, I mean, revenue growth was strong, like you mentioned, but it's also important to note that comparable sales weren't great. Most of the growth was, you know, new stores and things like that. Comparable sales were up just 0.4 % year over year in the U.S., 0.6 % worldwide, and that's after a 55 basis point currency tailwind. So people are still spending money on what they need for their homes. You know, some, like Lou mentioned, purchases of$1 ,000 or more are up slightly. Some people have to spend that and, you know, we're deferring maintenance, hoping the interest rates were going to come down.

3:11Consumer confidence is low. Interest rates remain high. The housing market is still extremely slow and very few homeowners are using their equity to finance projects. This has been going on with Home Depot for the past, I'd say, three years at a minimum. And until we see significant improvements in home affordability, either in the form of prices coming down or rates coming down, I don't really see much changing here.

3:33Tyler Crowe:I want to pull back the lens a little bit because, you know, pretty looking just at the quarter is pretty short term. Over the past five years, though, the shares of the Home Depot are roughly where they were. I think it's maybe like up 7%, 8 % over the past five years, compared to a gain of 78 % on a total return basis. So that includes dividends for the S &P 500. That level of underperformance, I don't think I've ever seen that, or I can at least remember when it comes to Home Depot. I mean, even during the dot-com bust and the Great Recession, Home Depot went down with the rest of the market.

4:12Tyler Crowe:This has been one of those times of divergence in the performance of Home Depot as a business and as a stock. I'm not going to question that Home Depot is a quality business or not. This is the duopoly of home improvement, and it's been a wonderful business for going on almost, I think, more than 40 years now, at least as a publicly traded company. And, you know, there's obviously the argument like it could be the best this is ever going to go. And maybe this is just an underperforming stock for here or maybe a short-term tailwind or headwind, excuse me, when it comes to Home Depot stock. So I want to ask this.

4:47Tyler Crowe:Is Home Depot a value investment or, in the other term, a value trap where it looks cheap but you're probably getting underperformance because it's cheap for a reason? Yeah. So you correctly mentioned it has really underperformed the market. But a few things to point out. So number one, Home Depot is trading pretty in line with other what I would call housing adjacent stocks over the past five years or so. If you back out the MAG-7 and certain other aspects of the AI trade, the S &P 500 is not up 78 % over the past five years without those parts of the market that have been kind of divergent from everything.

5:22And lastly, five years ago, which was May 2021, we were at what I would consider close to the peak of housing euphoria in the U.S. The average 30-year mortgage rate was about 3%. Prices were rising rapidly, so there was a lot of incentive to sell and buy and sell and buy and refinance. There was a lot of stimulus being injected into the economy. So in short, the fact that Home Depot's flat versus exactly five years ago isn't that terrible considering the environment for housing and interest rates and just consumer confidence now compared to then. So at the current price, Home Depot shares are roughly 30 % below their high.

6:00which was reached in late 2024. And you're right, Tyler, we don't see this kind of underperformance from Home Depot often. Before this one, Home Depot has only experienced two 30 % drawdowns in the past decade. One was a very quick blip during the initial COVID crash, and the other was during that 2022 bear market when interest rates went from 3 % to 7 % in a year. It's a rare discount. The stock trades for about 20 times forward earnings, It has about a 3.1 % dividend yield. At some point, I don't know when, at some point the real estate market will become more active. So I like the stock as a long-term investor here.

6:40Lou Whiteman:Definitely value, not value trap. Basically what he said. Look, I'm gonna take the over on how long that recovery is gonna take. But the good news is, like Matt said, the recovery is not priced in. I don't see any reason to rush in at these levels. I don't think it's like you must buy now. I'm guessing we'll be buying at these levels for a while now, but you get the decent yield, a good solid track record of declining share count. It's not on the top of my list to buy, but it's not a bad choice either.

7:08Tyler Crowe:I wanted to talk Home Depot today, and I thought we could go one show where we don't mention the word AI once, but Matt had to ring the bell, so we didn't mention it, unfortunately. So I don't know, put the timer on eight minutes in. We're talking AI already. To the point about the dividend yield, too, Home Depot's dividend yield, 3.1%, is basically the highest it's been since the Great Recession. So keep that in mind when we're thinking about this as a future investment, those who are actually looking for income. Coming up after the break, we're going to take this discussion about the housing-adjacent stuff that Matt was talking about and take a wider look at what's been going on in the housing market and what investors should be thinking about.

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8:52Tyler Crowe:As we were mentioning up at the top, Home Depot's performance as a stock has been indicative of what we've seen across the residential home, the residential construction market, basically anything that isn't tied to commercial and industrial development these days when it comes to construction. And that's been going on for several years now. Home sales and renovation rates have ground to a halt. And as Matt said in a previous segment, interest rates do have a big play in that. Interest rates today are considerably higher than they were during COVID and right after COVID. But it's at a level that is quite staggering.

9:30Tyler Crowe:There's a great real estate blog. It's by Bill McBride. It's called The Calculated Risk Real Estate. He puts out this amazing chart on housing starts, and it goes back for almost 40 years. And right now, existing home sales in the United States are basically at the same pace they were during the financial crisis, during 2008, 2010 period, or as far back as the early 1990s, when basically the United States population was 90 million fewer people than we have today, and yet home sales are right around that levels. So when I hear that and we talk about interest rates as like the big culprit here, I almost feel like there has to be more to it, right?

10:10Tyler Crowe:Like, is it just interest rates? Is it consumer sentiment? Like, what is driving this unprecedented low in home sales and renovations and all of these things?

10:23Lou Whiteman:So certainly interest rates aren't helping. But look, we are too far into this interest rate cycle. They've been where they are long enough now. Everything normalizes. I believe that. So I don't think we can blame interest rates anymore, Tyler. I think you're right. And I don't blame the homebuilders either for those starts numbered because I, as someone who's sort of been poking around for real estate right now, it's amazing the way homebuilders are aggressively discounting the inventory they have. Why should they be starting more when they're doing that? What I think is going on here, I think you have to step outside of housing to really, really get the explanation.

11:00Lou Whiteman:Housing is just one part of a wider affordability crisis. I mentioned this on the podcast last Friday, but wealth inequality in the U.S. is currently at levels last seen in the 1920s. It's going to take more than shaving 100 or 200 basis points off the mortgage rate to change people's ability to buy houses. It's not an interest rate story anymore. We have a tend to focus on housing kind of with blinders on and see it just with moving rates, economic activity, just kind of seeing the world through housing and levers. I'm in the slower for longer camp because I think if you look outside of housing, outside of these levers, there are factors driving this slowdown that I don't think interest rates or anything the home builders can do.

11:47Lou Whiteman:I don't think there's anything they can do to solve this. I mean, it's a few different factors. Some of it was pulled forward demand during COVID, like you said. I know a lot of people who bought homes during COVID, myself included. And some is the fact that consumer sentiment is extremely low right now. I'm not sure if it's quite at an all-time low anymore, but it's pretty close. Interest rates being stubbornly high are certainly not helping. But there are some reasons to be positive going forward. So, for example, wage growth in the U.S. is currently outpacing inflation, and it's significantly outpacing home price increases.

12:19Home prices rose on average about 1.3 % in 2025. So affordability could improve even without meaningful changes in interest rates or home prices. So I believe that at some point, inflation will be brought under control and gravitate toward the Fed's 2 % target and interest rates will come down, not to the 3 % mortgage rates we saw in 2021, but the 5 % area is certainly realistic. And doing the math, a 30-year mortgage rate moving from 6.5%, we're roughly where it is now to 5 % is effectively a 15 % discount on the principal and interest portion of a mortgage. So it would get many people who are currently stuck in place, you know, off the sidelines.

13:01Tyler Crowe:I can see that certainly with like the, with the wealth equality thing, it's certainly, when I think about that, it's like the first time home buyers, I think is, is a market that has been strained incredibly hard recently. And I don't see that changing a whole lot either, But to Matt's point, too, there is this portion of the market, like move up and people changing houses and things like that, where there are also like weird signs of optimism. And this actually came because we were talking about Home Depot is doing some looking at some previous conference calls and things like that. And this was a quote from Home Depot CFO Richard McFall during their like analyst day call back in December.

13:42Tyler Crowe:And I'm going to paraphrase a little bit, but basically, since 2019, the value of housing stocks have grown over 60%, and home equity values have gotten even bigger because people have been paying down their mortgage. There's basically$16 trillion worth of home equity that people could tap for various reasons, either to move up into a new home or to make that renovation that we're talking about. And the average home-to-loan value, how much outstanding mortgages people have, it's down at the 27 % range. That is, I think, one of the all-time lows because we have a very, very high proportion of home sale or owned homes in the United States that are owned outright, that don't even have a mortgage on them anymore.

14:28Tyler Crowe:People who have lived on their entire lives. Not sure if they're going to leave, but it's certainly significant in terms of how we think about the housing market in general. And with them sitting on, as McFall said, was like all this dry powder for use. You know, you could make the argument that there is this coiled spring for like renovations and spending and mortgage refinancings in the world of lower interest rates. I know there's other factors involved, but as to Matt's point, like a lowered interest rate would have a significant impact on this in the long run. And so in this scenario where you have this coiled spring of dry powder for renovations for people to make moves in their houses or something like that, thinking about this whole industry in general, what would you as an investor be looking at?

15:22Tyler Crowe:Are there companies in particular or is there sectors? Like what would get you excited on this idea of playing a multi-year tailwind for this industry? Yeah. So the one number I would give to sum up pretty much all of what you just said is$35 trillion. That is the estimated total of all U.S. homeowners equity. That's by far a record high. That's roughly twice what we had going into the COVID pandemic. So I'm looking at companies in the mortgage space for refinancing. Rocket companies is a big investment of mine. They're the number one consumer facing mortgage lender in the U.S. I like companies that specialize in renovation products.

16:02Trex is one that's been on my list for a little while now. And I think that decking is a project that people often finance with home equity. But I mean, honestly, that$35 trillion number, this is a big enough opportunity that there could be plenty of winners in both the financial sector and in the consumer discretionary sector that produces renovation-type products. So there's room for a lot of winners here.

16:26Lou Whiteman:Yeah, I'm much more bullish on the idea that people with homes will invest in their homes than I am bullish on the idea of an uptick in the housing market anytime soon. And it's back to that inequality thing. If we are in this K-shaped economy, the haves and the have-nots, one of the lessons of the last year is people who can spend continue to spend. People with houses will continue to invest in their homes. That is different from saying that people who haven't been able to buy homes will be able to. So I do think, yeah, Home Depot outperforms the home builders for now. I'm honest. To be honest, I'm more interested in Home Depot or Lowe's and something like Trex.

17:07Lou Whiteman:I'd rather have broad exposure to than anything niche, I think right now. But I do think, especially relative to housing, home improvement can work.

17:18Tyler Crowe:Coming up after the break, we're going to take investor questions.

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18:28Tyler Crowe:if you want to get your questions answered on air go ahead and email us at podcasts at fool.com that's podcasts at fool.com the three rules we've always said so far is one keep it foolish two keep it short enough i can read it on air and three we cannot give personalized advice so try to keep it to asking about an individual stock or what we as investors would do rather than asking for personalized advice. So Lou, Matt, and I don't get in trouble with the SEC. And guys, I used to listen to a lot of classic rock radio, and they always used to do that double shot Tuesday sort of gimmick. So we're actually going to do two investor questions here because one's relatively short.

19:06Tyler Crowe:I think they're good general kind of questions here. First one comes from Zach. And the question is, he wants to know what to do with dividends. Do you let them get automatically reinvested, or do you prefer to have more control where they go and the timing of when you actually purchase stocks? Zach would like to know a discussion on dividends and all types of investments across, depending on the type of investment account, would be really appreciated. Thanks. That's from Zach. So Matt, what do you think? Reinvest or depends where it is, what kind of company? What do you say? If you asked me a decade ago, my answer would be very different.

19:43So to be fair, dividend reinvestment used to be far more valuable than it is today. Until about 10 years ago, fractional shares weren't widely available to trade through pretty much any broker I know, maybe Robinhood. And you had to pay a commission on pretty much every single stock trade you make. At the time, I think my commission was$6.99 a trade, even if I was buying one share. So dividend reinvestment allowed you to skip those things. You could buy fractional shares, not pay commissions, and have all of your dividends put into new shares to continue to compound. Now that's not an issue. So it's not quite as much of a no-brainer as it used to be.

20:19So with the account by account thing, so I still have my retirement accounts set to automatically reinvest dividends. That's where most of my dividend stocks are, first of all, like all my real estate investment trusts are pretty much in retirement accounts. It just makes it easier to compound your returns if you want to set like your retirement investments on autopilot. On the other hand, in my taxable account, I'm generally more actively looking for opportunities. I'm more likely to get into growth stocks. If I have any stocks linked to the AI trade, that's where they are. So I like to let my dividends accumulate for a while and have the ability to put them to work wherever I see the best long-term value.