Going Into Earnings, Is Home Depot Stock a Buy, a Sell, or Fairly Valued?

Home Depot HD is set to release its fiscal fourth-quarter 2025 earnings report on Feb. 24. Here’s Morningstar’s take on what to look for in Home Depot’s earnings and the outlook for its stock.

Key Morningstar Metrics for Home Depot

• Fair Value Estimate: $325.00
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Home Depot Earnings Release Date

• Tuesday, Feb. 24, before the start of trading

What to Watch for in Home Depot’s Q4 Earnings

• We’ll be looking for how the pro side of the business has progressed. The firm has made some sizable acquisitions in the distribution space over the past few years, and there should be some important cross-selling and unit growth opportunity.
• We will also be watching for whether the firm will be able to deliver in the preliminary 2026 guidance range offered at its December investor day, which included adjusted operating margin at 13% (if they can capture 2% same-store sales growth). Housing turnover has remained depressed.
• We’ll be tracking any green shoots on a recovery case and whether that is still some time away.

Fair Value Estimate for Home Depot

With its 2-star rating, we believe Home Depot’s stock is moderately overvalued compared with our long-term fair value estimate of $325 per share. Given the maturity of the domestic home improvement industry, we expect total demand to largely depend on changes in the real estate market, driven by prices, interest rates, turnover, and lending standards.

We project 4.2% average sales growth over the next decade after housing market stabilization boosts DIY spending back to historical levels, supported by offerings like buy online/pick up in store, better merchandising, and improved delivery options, which will drive market share gains.

In the longer term, we forecast gross margins to hold steady over the next decade (ending 2034 at around 33.3%) while the SG&A expense ratio improves incrementally (leveraging 70 basis points over the next decade, to 17.3%) as the firm capitalizes on its scale and supply chain improvement initiatives while investing to protect its market leadership. This leads to a terminal operating margin of 14.5%, in line with its pre-pandemic peak.

Read more about Home Depot’s fair value estimate.

Economic Moat Rating

We assign Home Depot a wide economic moat. As the largest global home improvement retailer, the firm possesses a competitive edge owing to its brand intangible asset and cost advantage, in our view. Over the past 10 years, Home Depot’s sales growth has outpaced the building materials and garden equipment and supplies dealer industry’s average growth of 5.4% by 150 basis points annually (based on the US Census Bureau data), an indication of the brand’s ongoing relevance.

We expect Home Depot’s strong brand equity and extensive scale should enable incremental market share gains in a highly fragmented $1.1 trillion North American home improvement market, on top of the roughly 15% market share it has amassed thus far (given roughly $159.5 billion in sales in 2024).

Read more about Home Depot’s economic moat.

Financial Strength

Home Depot has had no concerns tapping the credit markets to finance the business in recent years. The firm was able to raise $10 billion in debt during the first half of 2024 in order to finance part of the $18.25 billion SRS Distribution acquisition. This left Home Depot with a total debt above $53 billion at the end of 2024.

Management has halted share repurchases with higher expected debt service as a result of the SRS acquisition. However, we model share repurchases to resume at the end of 2026, after Home Depot works its leverage metrics back to 2 times after digesting the GMS transaction in 2025. Including the impact of recent acquisitions, EBIT is forecast to cover the net interest expense 9 times at the end of 2025.

Free cash flow to the firm has averaged about 6% of sales over the past three years, supporting higher leverage and we expect the company will stay within its targeted adjusted debt/EBITDAR metric of 2 times over the long term. The balance sheet’s $28 billion in net property, plant, and equipment provides an asset base to secure debt if necessary.

Given Home Depot’s ability to generate tremendous free cash flow to the firm (we forecast an average of $18 billion in 2025-34), we expect management will have no problem facilitating dividend payments and remaining at or above its long-term dividend payout ratio target of 55%.

Read more about Home Depot’s financial strength.

Risk and Uncertainty

We give the company a Medium Uncertainty Rating owing to its strong brand recognition, which has helped stabilize sales through the cycle. Home Depot’s sales are largely driven by greater consumer willingness to spend on category goods in both necessary and discretionary home purchases.

In uncertain economic times, consumers remain in their homes, embarking on improvement projects, boosting DIY revenue. Alternatively, when home prices rise, the wealth effect generates a psychological boost to consumers, reinvigorating professional sales. Now, with the MRO and pro businesses (HD Supply, SRS, and GMS), revenue could be less cyclical, as the maintenance side of the business can prove to be more consistent.

In our opinion, Home Depot has minimal environmental, social, and governance risk. Product sourcing, potential data theft, and consumers’ shift in preferences to sustainable product offerings are relevant, but Home Depot should be able to adapt, and we do not see any material financial impact from these factors.

Read more about Home Depot’s risk and uncertainty.

HD Bulls Say

• Home Depot’s continued investments in supply chain and merchandising should improve productivity and support its leadership position in the home improvement market.
• The firm has returned $73 billion to its shareholders through dividends and share buybacks over the past five years, more than 20% of its market cap. We forecast Home Depot will return more than $70 billion to owners over the next five years.
• The large professional market is $300 billion. As Interline and HD Supply make up a low-double-digit share, SRS reaches these specialists, and GMS joins the mix, share is up for grabs.

HD Bears Say

• Weak consumer spending, higher interest rates, or an economic downturn could hinder sales for home improvement projects and affect Home Depot’s growth.
• IT and supply chain improvement gains could prove more challenging to achieve, as simpler efforts have already bore fruit. Further productivity efforts could face some implementation risks, creating inconsistent profitability.
• As Home Depot digests more than one sizable acquisition, integration risk remains, and management could be distracted by idiosyncratic issues at larger tie-ups like SRS or GMS.

This article was compiled by Rachel Schlueter.