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Why Home Depot Stock Is Still Dropping

By Rich Smith - Feb 24, 2021 at 12:58PM

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And why that could be a mistake.

What happened

Home Depot (HD 0.91%) investors can't seem to catch a break. After losing more than 3% in Tuesday trading, shares of the home improvement superstore chain are down another 4.7% as of 11:55 a.m. EST Wednesday. It's the fourth day in a row the stock is down.

So what

Why are Home Depot shares sinking? Didn't fiscal fourth-quarter sales (reported yesterday) surge 25% year over year, with a 24% gain in same-store sales, beating analyst estimates for both sales and earnings? Didn't the company also raise its dividend by 10%?

Well, yes it did -- but that's not the problem. What's worrying investors this week isn't what Home Depot said about 2020, with which management said it was "pleased," but what it said about 2021, which was... not much.

"Given the uncertainty related to the duration of the COVID-19 pandemic and its influence on the consumer, the Company believes it is limited in its ability to forecast demand for fiscal 2021," management said in a statement. "As a result, the Company is not providing guidance for fiscal 2021."

Green stock arrow shooting up among the numerals 2021

Image source: Getty Images.

Now what

Home Depot did concede that "if the demand environment during the back half of fiscal 2020" -- which was "unprecedented" -- "were to persist through fiscal 2021, it would imply flat to slightly positive comparable sales growth and operating margin of at least 14 percent."

But here's the thing: According to at least one analyst, Morgan Stanley, Home Depot's limited guidance for 2021 looks conservative, and assumes that the company's expenses in 2021 would also be comparable to what it had to spend to navigate the pandemic and the recession in 2020. However, if expenses are any lower in 2021, the analyst company believes there could be "real upside to a 14% margin if HD can comp at least flat" in 2021.

Long story short, the $12.53 per share in profits according to generally accepted accounting principles (GAAP) that analysts expect Home Depot to earn this year could be the least this company earns. And if that turns out to be the case, Home Depot shares could be turning back up in short order.

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