Raymond James downgrades Home Depot, says there are challenges ahead despite solid earnings report

Published Wed, Nov 16 20227:06 AM EST

Hold off on Home Depot for now, according to Raymond James. Analyst Bobby Griffin downgraded shares of Home Depot to market perform from outperform, foreseeing challenges next year for the housing sector. "Our change in opinion is not a reflection of Home Depot's execution (has been solid), but more so our view that the risk/reward for HD entering 2023 now appears more balanced, with the ongoing risk/headwinds to the U.S. housing industry and the stock recovering nicely off its 2022 lows," Griffin wrote in a Wednesday note. "While we are not forecasting a significant correction in earnings (base case is up ~2% y/y), we are concerned that transactions could remain negative in 2023 (slow sequentially again versus 2019 base year), leading to comparable sales pressure, especially as inflation tailwinds to comps abate some (average ticket growth has been the recent driver of comps)," Griffin added. Home Depot posted on Tuesday better-than-expected results for the third quarter , while reaffirming its full-year outlook. Market participants worried that rising costs could cut into home renovation and do-it-yourself projects and weigh on the company's results. Regardless, the analyst expects more trouble ahead for Home Depot, as shoppers may lower their spending next year should home prices start to fall, weighing on sales. The stock is down nearly 25% this year. It fell 1.2% in Tuesday premarket trading. "[Any] potential decrease in home prices ... could hinder consumer's perceived return on investment in their homes following several years of record spend in the category," Griffin wrote. "Accordingly, with HD now trading back at ~18x our forward EPS (up from ~16x, but admittedly still below its historical average of ~20x), we are placing our stock recommendation on the sidelines for now," he added. Still, Griffin said the long-term investment case for Home Depot remains intact, as he expects that the retailer will continue to take market share from here. —CNBC's Michael Bloom contributed to this report.