Morgan Stanley: Home Depot, Inc. (HD.US) second quarter report supports expectations of rising stock prices, reaffirms "buy" rating.

After the release of second quarter earnings by Home Depot, Inc. (HD.US), Morgan Stanley issued a research report, maintaining a "hold" rating on Home Depot, Inc. with a target price of $415. Morgan Stanley stated that the second quarter performance in 2025 maintained a bullish scenario for Home Depot, Inc., with forecasts for 2026/2027 remaining unchanged. Morgan Stanley pointed out that the second quarter performance in 2025 allowed for the optimistic expectations of a rise in Home Depot, Inc.'s stock price to be maintained: the real estate market has bottomed out, and the stock prices of home improvement companies (Home Depot, Inc. and Lowe's Companies, Inc. (LOW.US)) reflect the market's anticipation of a long and gradual recovery process. Therefore, signs of accelerated revenue growth should drive profit and P/E ratio increases. Home Depot, Inc.'s performance has kept these expectations unchanged. Comparable store sales are in line with expectations, and the company's business management is good, laying the foundation for potential leverage in operations during an economic cycle recovery. Morgan Stanley stated that the most important information revealed in the second quarter of 2025 was that the U.S. comparable store sales achieved growth for the third consecutive quarter, after declining for eight consecutive quarters. The bank believes this reflects the bottoming out of the real estate market, the gradual fading of the impact of the COVID-19 pandemic, and the internal efforts made by Home Depot, Inc. in the professional and DIY sectors. Although the rebound was not astounding, the market had already expected it and reflected it in the stock price. It is important to note that Morgan Stanley believes the growth in comparable store sales, excluding the impact of hurricanes, is positive (despite a slight decrease of 0.4% overall). In terms of average ticket size, comparable store sales average ticket size increased by 1.4%, indicating that tariffs have not had an effect yet. Morgan Stanley believes this increase is due to a higher percentage of big-ticket items, similar to the first quarter, even though other discretionary categories have not yet rebounded. The reason for the accelerated growth in bullish construction companies is either a faster real estate market recovery or signs of profitability in complex projects. Morgan Stanley added that the quality of earnings per share for Home Depot, Inc. in the second quarter of 2025 was decent. Despite comparable store sales meeting expectations, EBIT margins and earnings per share were slightly lower than expected. This was mainly due to slightly better gross margins (possibly due to reduced inventory and internal measures), but was offset by higher-than-expected sales and general and administrative expense leverage. Prior to the earnings announcement, the market had raised expectations for U.S. comparable store sales, especially given the recent increase in the stock price. Morgan Stanley believes the 1.4% growth in U.S. comparable store sales may be slightly lower than these higher expectations, but still considers it a good performance, and reiterates its stance that the argument for the housing market bottoming out remains valid. Regarding the outlook, Morgan Stanley wrote that the expectations for earnings per share (EPS) in 2026/2027 are unlikely to change significantly. Estimates for comparable store sales and earnings per share in 2026/2027 are not expected to change much, and bullish expectations remain unchanged. Assuming a 3.6% growth in comparable store sales in 2026 and a 4% growth in 2027, and that for every percentage point increase in comparable store sales, the EBIT profit margin expands by about 10 basis points, then earnings per share will reach approximately $16.30/$17.85, representing an annual increase of about 9%/10%. As Home Depot, Inc. has reaffirmed its guidance for comparable store sales and earnings per share in 2025, this indicates that expectations for the second half of the year have not changed. With inventory conditions gradually improving, Morgan Stanley now believes there is moderate upside potential for the second half of 2025.