At least six Wall Street analysts lowered their price targets on The Home Depot (HD -0.91%) stock after the company's second-quarter earnings release on Aug. 13. However, a UBS analyst decided to take a different view and upgraded his price target to $425 from $400 while maintaining a buy rating on the stock.
An analyst gets more optimistic
It's unusual to see an analyst upgrade a price target after management comes out and lowers its full-year expectations for sales and earnings. Home Depot's management now expects its full-year comparable sales to decline by 3%-4% compared to prior guidance for a 1% decline. Full-year diluted earnings per share are now expected to decrease by 2%-4% compared to previous guidance for a 1% increase.
That said, it's no secret that relatively high interest rates have curtailed the housing market and spending on home-related items, with a raft of companies, including Whirlpool and Pool Corp., talking of deteriorating end-market conditions. As such, the bulls are assuming much of the bad news is already in the price, and the only way is up for Home Depot stock, as the only way is down for interest rates.
Indeed, UBS analyst Michael Lasser believes Home Depot is positioning itself well for an eventual recovery. One way the company achieves this goal is by its recent acquisition of SRS, a roofing, landscape, and pool product distributor, to expand sales in the professional market.
Image source: Getty Images.
The bull and bear debate
The new UBS target implies a 17% upside to the current price and represents a bullish view that lower interest rates will improve the housing cycle. In contrast, the bears believe a recovery could be more sluggish than many expect.
The debate will inevitably rage on, but bulls should take heart from the relatively low unemployment rates, which typically support the housing market. While there's near-term risk around Home Depot stock, the longer-term picture looks more positive.
US Existing Home Sales data by YCharts
