History says Home Depot doesn’t exactly thrive following hurricanes, despite what the logic might seem to suggest and the “if/then” logic is perfect.
If hurricanes are highly destructive to buildings and homes and since the likes of Home Depot Inc (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW) sell goods to make the necessary repairs to damaged structures, then a couple of major hurricanes striking the U.S. in the same year should mean a bump-up in the home-improvement retailing business.
There’s just one problem with the logic, it doesn’t exactly hold up when put to the test.
If you bought into Home Depot stock specifically because of the havoc hurricanes Irma and Harvey brought with them, you may want to take your profits sooner than later.
Do Hurricanes Actually Help Home Improvement Stores?
First and foremost, credit has to be given for the work Home Depot did before and after both hurricanes to lend a helping hand.
Perhaps first and foremost, even before Harvey made landfall in late August, Home Depot was moving needed merchandise toward Texas’ eastern coast, about 700 truckloads worth of supplies, to let people in its path do what they could to defend themselves from the storm. Ditto for the Floridians facing Irma. The coordination of the efforts were fine-tuned when the company activated its hurricane command center in Atlanta after Harvey hit, and it’s still up and running in response to both storms.
And, recognizing that hammers, nails and lumber can’t fix everything, Home Depot has upped its financial assistance to the hurricane’ victims to $2 million, joining countless other companies and individuals who have pledged money to help those who need it the most. If nothing else, it’s encouraging to see corporate America do what it can when it’s needed the most.
If you think hurricanes translate into a colossal business boon for home improvement retailers though, and therefore will help buoy the price of Home Depot stock, think again.
The basis for the premise is history. A simple look back at how Home Depot’s revenue and earnings trend were affected by other major hurricanes — mainly 2005’s Katrina, Sandy in 2012 and 1992’s Andrew — doesn’t reveal any unusual revenue or earnings “spike” for the quarter the hurricane hit, or the subsequent quarter. Mostly it just looked like business as usual.
No, this isn’t what you’ve been hearing from most of the so-called pros, many of whom have been calling the hurricanes’ impact an opportunity for Home Depot and a good reason to buy Home Depot shares. UBS analysts Michael Lasser, for instance, reckons that damage inflicted by Sandy in 2012 led to an extra $500 million worth of business in each of Home Depot’s next four quarters. While there’s no doubt Sandy’s damage helped the top and bottom line some, it’s difficult (if not impossible) to determine if that growth was the result of Sandy, or simply because we were in the midst of a housing boom.
It also can’t be ignored that for all the insurance payouts that will certainly be spent at home improvement stores, Harvey and Irma have outright shut down commerce in a variety of ways, perhaps closing many uninsured businesses permanently.
Whatever the case, the chart above speaks for itself. Neither Sandy nor Katrina nor Andrew actually, significantly altered Home Depot’s earnings and revenue trajectory.
Bottom Line for Home Depot
None of this is to suggest Home Depot won’t see patrons impacted by Irma and Harvey coming into its stores. It’s simply to point out that history doesn’t show any significant bump in a storm’s aftermath. What it gains in rebuilding spending is likely offset by what it loses when hurricanes put the kibosh on so many other forms of commerce.
In that light, the trailing P/E of 23.0 Home Depot currently sports is looking a little frothy.
— James Brumley
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Source: Investor Place