Two of the economic indicators, housing starts and interest rates have a trickle down effect on Home Depot's business. The current outlook for both of these indicators is still , unfortunately, bleak. We are firm believers in Edward Learner's thesis that "Housing is the Business Cycle". It is still considered the source through which we view the economic cycle. According to a survey by PAA Research, the housing market colors every investment idea evaluated and consistently provides the prism to strategically forecast our economic indicators.
The significance of the housing market and it's importance to this economy cannot be overstated. There is a wealth of quality information about real-time trends on new and existing home sales provide a reasonable snapshot of the housing market, which is affected by a lot of the economic indicators. It is also affected by various cross-currents such as home prices, inventory levels, foreclosure activity, default ratios, short sales and credit availability.
When you consider that there is strong affordability in the market and more and more people are starting to use conventional sources of financing. However, prices are still declining, inventory levels are bloated, credit is tight and the boom from the homebuyer tax credit has stagnated the industry. When you take into account that new home sales and inventory has reached trough levels, Home Depot has a reason to be concerned.
All of the previously items are a real threat to Home Depots business. They are extremely vulnerable to the interest rates, which continue to trickle down and fall in the category of housing market slowdown.
Home Depot operates under four different business segments:
Plumbing, Electrical and Kitchen (29.8% of net sales)
Hardware and Seasonal (29.1% of net sales)
Building Materials, Lumber and Millwork (21.9% of net sales) Paint and Flooring (19.2% of net sales)
According to the Washington...