Home Depot Isn’t Broken — The Housing Cycle Is

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.

At $354, I’m paying fair value for a cyclical trough. Not expensive, not cheap — just... waiting.

TL;DR

Home Depot is a best-in-class retailer in a cyclical trough — housing turnover at multi-decade lows.

Comp sales decelerating: Aug +2%, Sept +0.5%, Oct -1.5%. Third straight earnings miss.

At $354, trading at ~22× forward earnings — roughly fair value for a quality cyclical.

My buy zone: $315-330. Near the 52-week low, probability around 25-35% based on historical pullbacks. If it breaks through to $300, I’ll add more.

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

Core 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.

What the business actually 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) and GMS Inc (2025, ~$5.5B) — both focused on Pro customers. Big bets that need to pay off.

Q3 2025: Revenue $41.4B (+2.8% YoY, mostly from acquisitions). Comp sales +0.2% (missed +1.4% expectations). Monthly comps decelerated hard: August +2%, September +0.5%, October -1.5%.

Valuation: At $354, HD trades at ~22× forward earnings with a ~2.6% dividend yield. Roughly in line with its 10-year median. Fair for a quality cyclical — not cheap, not expensive.

Where the returns actually came from

HD: ~$230 in 2019 → ~$354 today. Up ~54% over five years.

Here’s what drove it:

About 50% from earnings growth. EPS went from ~$10 to ~$14.50 (guided). The COVID home improvement boom helped, then faded.

About 30% from multiple expansion. P/E expanded from ~20× to ~22× as the market paid up for quality retailers.

About 20% from dividends and buybacks. Consistent capital return program.

The catch: earnings peaked at $16.69 in FY2022. We’re now guiding to $14.48 for FY2025 — that’s a 13% decline from peak. The easy gains from COVID are gone, and the housing cycle hasn’t turned yet.

Future returns depend on the housing cycle recovering and earnings getting back to $16-17+. At $354, you’re paying for that recovery before it’s happened.

What’s holding the price up

This is a quality machine, not a hope machine. Here’s what’s propping it up:

Dividend floor. $9.20/share annually, 15-16 consecutive years of increases. At $354, that’s a 2.6% yield. Income investors provide a bid.

Institutional ownership. ~70% held by institutions. Dow component. Core holding for dividend growth and quality funds. Not going to get abandoned.

Pro segment growth story. SRS and GMS acquisitions position HD as the dominant Pro supplier. The narrative is “when housing recovers, HD captures more share.”

The embedded narrative: “Best retailer in America, temporary cyclical headwind.” That’s what 22× is pricing in. The market believes the trough is temporary and earnings recover to $16-17 by 2027.

Dependency mapping: This entire thesis depends on the housing cycle turning. If mortgage rates stay elevated and turnover stays frozen, earnings could deteriorate further before they recover.

Reflexivity: Moderate. HD uses its strong cash flow and stock price to fund acquisitions and maintain the dividend. But unlike growth stocks, the stock price doesn’t directly feed the business model.

Where the cracks are

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.

Third straight earnings miss: Q1, Q2, and Q3 all missed consensus EPS. FY2025 adjusted EPS now expected to decline ~5% YoY.

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.

Market expectations

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: 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.

Tripwires I’m watching

Comp sales: +0.2% now → watching for positive for 2 consecutive quarters (cycle turning)

Mortgage rates: ~7% now → watching for below 6% for 3+ months (housing thaws)

Gross margin: 33.4% now → watching for compression below 32% (pricing power eroding)

Dividend yield: 2.6% now → watching for 3%+ (better entry at ~$305)

Debt/EBITDA: ~2.5× now → watching for above 3× (balance sheet stress)

None screaming buy yet. The cycle hasn’t turned.

What could move this

Bull path (6-24 months):

Fed cuts rates aggressively → mortgage rates to 5-6% → housing turnover picks up

Pro segment gains share through SRS/GMS → revenue accelerates

Storm activity normalizes → easy YoY comps in 2026

Comp sales turn positive for 2+ quarters → multiple expands to 24-25×

Bear path (6-24 months):

Rates stay elevated → housing stays frozen → comps stay negative

Consumer weakens → big-ticket deferrals continue

Acquisition integration stumbles → margin pressure persists

Another guidance cut Q1 2026 → stock revisits $300

How it trades

At $354, HD is 17% below its 52-week high of $428.50 and 10% above its 52-week low of $322.47. Sitting in the middle of the range.

Down low-teens % YTD while the S&P is up double digits. Relative underperformance reflects the housing headwinds.

Momentum is neutral — not broken, not building. Waiting for a catalyst.

Long-term math

Bull (30% probability): Housing recovers, EPS to $17 by 2027, multiple expands to 25× → $425

Base (50% probability): Muddle through, EPS to $15.50 by 2027, multiple holds at 23× → $360

Bear (20% probability): Housing stays frozen, EPS to $14, multiple compresses to 20× → $280

Probability-weighted fair value: ~$360

At $354, I’m paying roughly fair value. Not overpaying, but no margin of safety either.

Decision Framework

Buy zone: $315-330 (~21-22× P/E, ~2.8-2.9% dividend yield) — near 52-week low, 25-35% probability of filling. If it breaks through to $300, I’ll add more.

Watch zone: $330-380 — where we are now. Fair value, no urgency.

Trim zone: $425+ — if housing recovers faster than expected and the stock gets ahead of itself.

At $354, I’m in the watch zone. Need either a pullback or proof the cycle is turning.

What would change my mind

I’d get more constructive if:

Comp sales turn positive for two consecutive quarters

Mortgage rates drop below 6% and stay there for 3+ months

Stock pulls back to $315-330 range

Management raises guidance

Kill switch

Comp sales stay negative for four consecutive quarters

Gross margins compress below 32%

Dividend gets cut or frozen

Debt/EBITDA rises above 3×

Final take

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 $354, 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 dividend investors: HD at $315-330 is attractive — you’re buying near the 52-week low with a chance to add more if it breaks $300.

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 $315-330. 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 and is not financial advice. Nothing here is a recommendation to buy or sell any security. I’m explaining how I analyze companies, not what you should do with your money.