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Should Investors Buy the Dip in Home Depot Stock?

Home Depot (HD 0.56%) shareholders can finally exhale. The home improvement giant recently announced third-quarter earnings results that should ease many of their worst fears about a sharp industry pullback.

Yes, soaring interest rates are pressuring demand for remodeling and upgrading projects. Home Depot is also dealing with a growth hangover following several years of booming sales.

But the company is still on track to set some impressive records in 2022, giving it strong momentum into the new year. With that backdrop in mind, let’s look at whether the beaten-down stock would be good buy today.

Good sales trends

Home Depot generated strong results through the selling period that ended in late October. Despite declining home prices and slowing home sales, comparable-store sales rose 4% to mark just a modest slowdown from the prior quarter’s 6% boost. And this year’s increase came on top of the 6% spike the company achieved a year ago. “We delivered another solid performance in the third quarter,” CEO Ted Decker said in a press release.

Home Depot got help from its leading market share position, which has helped it outperform rivals like Lowe’s so far in 2022. The company generates more sales from professional contractors than Lowe’s does, and that diversity is helping at a time when many consumers are pulling back on home project spending.

Profitability and cash

Investors should also be thrilled with Home Depot’s financial strength. The company reported a healthy gross profit margin of 34% of sales. Rising supply chain costs didn’t hurt the bottom line, either, as operating income landed at $6.15 billion, or 15.8% of sales. These wins show that the retailer isn’t struggling to raise prices, even as the industry’s selling environment worsens.

Cash flow was similarly strong, giving Home Depot plenty of financial flexibility. Shareholders have been the main beneficiaries of that flush cash position lately. Home Depot has spent over $11 billion on stock buybacks and dividends so far in 2022.

Watch for traffic

The biggest worrying sign from this report is Home Depot’s customer traffic trends. Its volume of transactions fell 4.3% in Q3 compared to a 3% decline in the prior quarter. Rising prices are offsetting those declines right now, but the chain needs this figure to stabilize soon for sales to maintain their upward momentum into 2023.

Management does see growth continuing through the end of the year, and Home Depot affirmed both its sales and profitability outlook for the year. That stability is another great reason to like this stock, even though the business is sensitive to economic pressures like rising interest rates.

Those pressures are the main reason why Home Depot’s shares are down this year and are trailing the wider market. But this latest earnings report illustrates how it can outperform through tougher economic times.

Home Depot has emerged from prior cyclical downturns — including the sharp slump during the Great Recession — as a stronger business. It is highly likely to do the same through the current slowdown. Investors should consider the stock price slump as another good reason to buy this stock, with an eye toward long-term growth and rising dividend income.

Read More: Should Investors Buy the Dip in Home Depot Stock?

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