Home Depot Q3 Disappointment Highlights Valuation and Execution Risks

What happened

Home Depot reported disappointing Q3 results with EPS down 1.4% and operating income falling 1.2% year-over-year. Full-year EPS guidance was lowered to a 5% decline versus 2024, reflecting ongoing pressure from high interest rates on big-ticket projects. The company is banking on a housing recovery next year and the integration of acquisitions like SRS and GMS to drive growth. However, the DeepValue report indicates the stock is already expensive at ~27x P/E, with modest near-term growth and integration risks from these acquisitions. Despite strong free cash flow and a solid balance sheet, the premium valuation seems unjustified given the near-term headwinds.

Implication

The Q3 earnings miss and reduced guidance highlight the persistent drag from high rates on large project demand, a key revenue driver. Acquisitions like SRS and GMS introduce near-term gross margin dilution and integration risks that could hinder profitability improvements. HD's premium valuation compared to peers like Lowe's lacks justification without clear evidence of accelerated growth or successful synergy realization. Downside is cushioned by robust free cash flow and manageable leverage, but upside is limited until comparable sales improve and integration progresses smoothly. Investors should closely monitor comps, margins, and acquisition milestones, as sustained weakness or execution missteps could warrant a more bearish stance.

Thesis delta

The DeepValue report's HOLD thesis is reinforced by the Q3 results, which confirm near-term growth headwinds and valuation concerns. The anticipated housing recovery and acquisitions offer potential upside, but integration risks and macro pressures keep the outlook cautious. No immediate shift in rating is warranted, but increased vigilance on execution and comps is essential.