Trading at slightly less than 26 times expected earnings for 2024, Home Depot (HD -0.91%) does not look like a good value stock. Still, no meaningful discussion about its current earnings trajectory and valuation can occur without considering how the state of the housing market and the interest rate cycle will impact its business. So let's dive in.
Home Depot's exposure to the housing market
The key external metric for investors to watch when they're weighing the outlook for this stock is existing home sales. Homeowners tend to refurbish their homes immediately before and after they buy or sell them. For this reason, the trends in the company's earnings -- measured here using earnings before interest and taxation, or EBIT -- are led by the trends in existing home sales.
HD EBIT (TTM) data by YCharts.
Zeroing in on the last three years helps highlight that pattern. In particular, note that the EBIT figure is for the trailing 12 months, which will lag immediate trend changes in existing home sales. As such, Home Depot's current earnings reflect a snapshot of where the housing market has just been.
HD EBIT (TTM) data by YCharts.
Moreover, when existing home sales start improving (and lower interest rates should certainly help on that front), investors will eventually begin pricing in an anticipated improvement in earnings. As such, current valuations will look expensive.
Image source: Getty Images.
Is Home Depot stock a buy?
While Home Depot is not as expensive a stock as many may think (assuming that a lower interest rate environment does in fact benefit the U.S. housing market), a company like roofing and insulation leader Owens Corning looks more interesting to me because it acquired a door company during the downturn. That could turn out to be a smart move.
Whirlpool is also worth a close look for investors with robust risk tolerance. Its sales and margins are suffering as consumers postpone purchases of major home appliances, particularly the kind of fitted kitchens and bathrooms that Whirlpool sells its higher-margin products into. Still, an improving housing market might encourage the release of some of that pent-up spending.
