Home Depot (HD): The Housing Cycle Play Everyone Owns But Nobody’s Timing Right

For: dividend / total-return investors
Horizon: 3–5 years — not a trade

Home Depot just told investors it’s going to make less money this year than it said a few months ago.

The stock is down more than 10% in 2025 while the S&P is up more than 10%.
Housing turnover is at multi-decade lows—and that’s when I start paying attention.

Core Thesis

Thesis: HD is a quality cyclical I’m watching, not buying—at a roughly fair price for a trough that may not be in yet.

The question is whether the housing cycle turns before earnings deteriorate further.

Business & Fundamentals (What the Company Is)

Home Depot is the world’s largest home improvement retailer. ~2,340+ stores across the U.S., Canada, and Mexico. Nearly half a million employees. $160B in annual revenue. This is a category killer with real scale advantages.

The business model: sell building materials, appliances, tools, and décor to DIY consumers and professional contractors. The Pro segment (contractors, remodelers, property managers) is roughly half of the total addressable market and where Home Depot has been investing heavily.

Recent Acquisitions:

• SRS Distribution (2024, $18.25B including debt): Roofing, landscaping, pools—focused on Pro customers
• GMS Inc (2025, ~$5.5B equity + debt): Building materials distribution, further expanding Pro reach

Q3 2025 Numbers:

Metric Q3 2025 Q3 2024 Change
Revenue $41.4B $40.3B 2.8%
Comp Sales +0.2% -1.3% Improved
Adj. EPS $3.74 $3.78 -1.1%
Gross Margin 33.4% 33.4% Flat
Adj. Operating Margin 13.3% 13.8% -50 bps

Revenue grew on acquisitions (GMS added ~$900M), but organic demand is weak. Comp sales of +0.2% missed expectations of +1.4%. Monthly comps decelerated: August +2%, September +0.5%, October -1.5%.

3-5 Year Trend:

• Revenue flat to slightly up for two years after COVID boom faded
• Gross margins stable at ~33–34%
• Operating margins compressing from 14%+ to 13% on acquisition dilution
• FCF currently running high single-digit to low-double-digit % of sales (~$14B on ~$160B revenue), down from mid-teens at peak
• EPS peaked ~$16.69 in FY2022, now guiding to ~$14.48 adjusted for FY2025

Balance Sheet: Net debt, moderate. Debt/EBITDA ~2.5x.

Capital Allocation: Dividends are the priority ($9.20/share annually, 15–16 consecutive years of increases). Buybacks have slowed as debt from SRS/GMS gets paid down. Capex running ~2% of sales, stepping up with integration.

Valuation vs History & Peers:

Metric Home Depot Lowe’s 10-Year HD Median
Forward P/E ~22X ~17X ~23X
Price/Sales ~ 2X ~1.5X ~2.2X
Dividend Yield ~2.7% ~2.0% ~2.4%

At ~22x forward, HD is roughly in line with its 10-year median. Fair for a quality cyclical in a trough—not cheap, not expensive.

Red Flags / What’s Changing

Housing Market Frozen: Turnover at multi-decade lows (~2.9% of housing stock). High mortgage rates created a “lock-in” effect. Home sales drive renovation spend—this is the core headwind.

Consumer Pulling Back: Management noted “softer engagement in larger discretionary projects where customers typically use financing.” Kitchen remodels don’t happen when HELOCs cost 9%+.

Comp Deceleration: August +2%, September +0.5%, October -1.5%. Demand weakened as the quarter progressed.

Storm Headwind: Lack of hurricane activity in 2025 hurt roofing/generator sales. 80 bps of comp pressure from this alone.

Acquisition Risk: SRS and GMS are big bets. GMS added 20 bps of operating margin pressure from transaction costs. If integration stumbles, these deals look worse.

Third Straight Earnings Miss: Q1, Q2, and Q3 all missed consensus EPS. FY2025 adjusted EPS now expected to decline ~5% YoY.

Expectations vs Reality (Consensus Check)

Street view: Consensus expects HD to muddle through 2025, then benefit from a housing recovery in 2026–2027 as rates come down. Analysts model mid-teens EPS by 2027. Average price target ~$410–425.

My view: I think the Street is right on direction but potentially wrong on timing. The housing recovery depends on mortgage rates dropping meaningfully—which depends on the Fed, which depends on inflation. If rates stay higher for longer, the recovery keeps getting pushed out. The earnings trough may not be in yet.

Catalysts & Timeline

Bull path (6–24 months):

• Fed cuts rates aggressively → mortgage rates to 5–6% → housing turnover picks up (next 6–12 months)
• Pro segment gains share through SRS/GMS → revenue accelerates (12–18 months)
• Storm activity normalizes → easy YoY comps in 2026
• Comp sales turn positive for 2+ quarters → multiple expands

If this plays out: EPS to $16–17 by 2027, stock trades 24–25x → $400–425.

Bear path (6–24 months):

• Rates stay elevated → housing stays frozen → comps stay negative (next 6–12 months)
• Consumer weakens → big-ticket deferrals continue
• Acquisition integration stumbles → margin pressure persists
• Another guidance cut Q1 2026 → stock revisits $280–300

Tactical Read

HD is down low-teens % YTD, near the bottom of its $326–439 52-week range at ~$333–343 depending on the day. The stock broke below its 200-day moving average after Q3 earnings and hasn’t reclaimed it. Momentum is broken—this is a falling knife setup until we see stabilization.

Positioning & Flows

Factor bucket: Quality Cyclical / Dividend Growth. Dow component, widely owned by institutions and dividend portfolios.

Crowded or underowned: Neutral. Core holding for many funds (~70% institutional ownership)—not hedge fund crowded, not ignored.

Rotation risk: If the market rotates toward growth/momentum and away from dividend/value, HD underperforms even if fundamentals stabilize.

Strategic View & Value Math (3–5 Years)

Return path (6–18 months): Likely chop. Housing isn’t recovering overnight. Best case: comp sales stabilize, stock grinds sideways. Worst case: another guidance cut, test $300.

Value range (3–5 years, rough):

Scenario Probability EPS Multiple Target
Bull 30% $17 25x $425
Base 50% $15.50 23x $360
Bear 20% $14 20x $280

Probability-weighted fair value: ~$360

At ~$333–343, HD is slightly below my ~$360 base fair value—roughly fair with a small discount, not a screaming bargain.

Where I’d get interested: $300–315 range (~20–21x forward P/E, ~3% dividend yield). At that level, I’m paying a trough multiple for trough earnings with better risk/reward.

What Would Change My Mind

• Comp sales turn positive for two consecutive quarters
• Mortgage rates drop below 6% and stay there for 3+ months
• Stock pulls back to $300–315 range
• Management raises guidance
• Dividend yield hits 3%+ (~$305 price)

Kill Switch

• Comp sales stay negative for four consecutive quarters
• Gross margins compress below 32%
• Dividend gets cut or frozen
• Debt/EBITDA rises above 3x

Final Take / Investor’s Lens

Home Depot is a best-in-class retailer in a cyclical trough. The business is solid, the balance sheet is manageable, the dividend is safe. The housing cycle will turn eventually.

At $333–343, I’m paying fair value for a business facing near-term headwinds with no clear catalyst. Housing is frozen, comps are decelerating, management just cut guidance for the first time this year.

For dividend investors: HD at $300–315 with a 3%+ yield is attractive. At current prices, the yield isn’t compelling versus other options.

For growth investors: This isn’t it. You’re buying a cyclical waiting for a turn, not a compounder.

For my own portfolio: HD goes on the watchlist at $300–315. At that range, I’m getting a quality compounder at a trough multiple. At today’s price, I’m paying full freight for uncertainty.

The housing cycle will turn. I’d rather wait for a better entry than chase a falling knife.

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Disclaimer: This content is for informational and educational purposes only—not financial advice. Do your own due diligence before investing. Nothing here is a recommendation to buy or sell any security.