A slowdown in housing has analysts asking questions of Home Depot (HD) ahead of its earnings release on Tuesday morning.
Shares of the Atlanta-based home improvement company are sliding slightly in early trading Monday as analysts dial in their estimates.
A shaky housing market is tempering Wall Street optimism on the retail giant.
"Our key message is that we see a period of housing uncertainty ahead, where the demand drivers that have mattered historically seem to be turning less favorable," Credit Suisse analyst Seth Sigman wrote in a research note detailing the environment.
He noted that the stock's pullback in October could help provide relief for investors as the problems ahead appear priced in, but was hopeful to see clearer demand drivers to make a firm decision.
"A 'wait and see' approach seems prudent," Sigman concluded, issuing a "Hold" rating for the stock.
The key driver of the concern about Home Depot is the recent report on mortgage application decreases, which has been coupled with worries over continued Federal Reserve rate hiking.
Mortgage applications decreased 4% to kick off November and hit their lowest level in about four years, according to the Mortgage Bankers Association's (MBA) Weekly Mortgage Applications Survey.
"Rates increased slightly last week, as various job market indicators showed a bounce back in job gains and an acceleration in wage growth in October," Joel Kan, MBA's associate vice president of economic and industry forecasts said. "Application activity decreased over the week for both purchase and refinance applications, with the overall market index down to its lowest level since December 2014."
Analysts have keyed in on this as a concern that might continue to weigh on HD shares into 2019, possibly clouding positive drivers in Black Friday and holiday sales.
"HD is down 15% since an all-time high in mid-September given concerns on the cycle with rising mortgage rates and moderating housing data points," J.P. Morgan analyst Chris Horvers said. "The consensus view is that HD will have a hard time going up given the cyclical overhang and with the comp bar roughly in line with the Street's 4.7%, the incremental investor is short."
Horvers maintained a "contrarian long" thesis on the stock, but moderated his estimates on same-store sales and reined in his price target based upon the cyclical pressure ahead.
To be sure, the decreased demand for new housing should help both Home Depot and its chief rival Lowe's (LOW) to take advantage of increased home improvement needs.
"Most signs of "housing softness" have centered on new construction," RBC Capital Markets analyst Scot Ciccarelli wrote in a research note on Monday morning. "Home Depot and Lowe's only have modest exposure to new construction."
He explained that Home Depot should benefit from renovation and remodeling of homes, which has held up as new construction has slowed.
Ciccarelli noted that he too would be reducing his price target based upon some uncertainty in the housing market, but took the view that the macro factors for repair and remodeling remains positive.
He issued a "Buy" rating for the stock, but trimmed his price target to $208 from $218.
The company's guidance on Tuesday morning will be pivotal as macro concerns in housing weigh on the shares and Jay Powell's Federal Reserve prepares additional rate hikes.
For the third quarter, analysts are expecting the company to report $2.27 in earnings per share alongside $26.2 billion in revenue for the third quarter, according to FactSet.
The report on the October quarter coupled with guidance will try to provide a positive price implication on earnings this year for HD to recover from its nearly $40 drop in October.