Duh! Runaway commodity price inflation doesn't help, see article two: Getting hammered on plywood
Reuters
Home Depot Falls on Mortgage Concerns
Tuesday September 9, 3:52 pm ET
By Karen Jacobs
ATLANTA (Reuters) - Shares of Home Depot (NYSE:HD - News) fell nearly 5 percent on Tuesday after a stock downgrade highlighted concerns that rising mortgage rates could slow the housing sector and that market saturation could crimp growth of the home improvement retailer, analysts said.
Goldman Sachs reduced its rating on Home Depot's stock to "in-line" from "outperform," saying it was taking a more cautious view of retailers in light of rising mortgage rates.
Higher mortgage rates are likely to slow the number of home purchases, which is "a key leading indicator of do-it-yourself spending," Goldman said in a research note.
Other analysts said higher rates weighed on the stock. "There's some concern that rising interest rates are going to have a negative impact," said Eric Bosshard of FTN Midwest Research.
The buoyant housing market has fueled the home improvement boom, and the historically low mortgage rates also encouraged homeowners to refinance mortgages and use the equity in their homes to finance improvement projects.
Washington Mutual Inc. (NYSE:WM - News) and Countrywide Financial Corp. (NYSE:CFC - News), the No. 2 and No. 3 U.S. mortgage lenders, separately on Tuesday said mortgage applications fell in August as rising rates dampened the home buying and refinancing boom.
But Bosshard said Home Depot, the No. 1 home improvement retailer which is investing heavily in store remodels, technology and new merchandise, was improving despite signs of a housing slowdown. "Home Depot has got so much ground to recapture within its own business that a slightly slower housing market is not nearly enough to distract us from being bullish."
Goldman also Home Depot's long-term growth is constrained by its high penetration in major metropolitan markets.
Home Depot "commands over 17 percent of the home improvement retail market--one of the highest market shares in retail and close to the 20 percent ceiling retailers rarely pierce," Goldman said.
Other analysts agreed.
"The primary concern we've had is slowing growth, and inherent in that is less opportunity to build new stores," said Michael Baker of Deutsche Bank Securities.
Goldman also said competition from rival Lowe's Cos (NYSE:LOW - News) could pressure Home Depot's sales. Recent Home Depot acquisitions in the builder sector and potential international purchases "offer unproven returns and, consequently, higher risk," the firm said.
Shares of Home Depot were down $1.72 to $32.03 in afternoon New York Stock Exchange (News - Websites) trading, while Lowe's stock fell $1.83, or 3.4 percent, to $51.87.
Goldman also cut Federated Department Stores (NYSE:FD - News) to "in-line" from "outperform" and May Department Stores (NYSE:MAY - News) to "underperform" from "in-line."
May stock was down about 4 percent, or $1.04, to $25.30, while Federated was off 2.8 percent, or $1.20, to $42.62.
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