Lumber prices have experienced a wild ride since the onset of the pandemic. But prices have mostly trended one way since March, and that is down. Indeed, the price of lumber per 1,000 board feet approached $1,500 at the beginning of March. As of this writing on May 31, the price had fallen to $659.

Since lumber is a popular product at Home Depot (HD -2.63%), the price change could have implications for the home improvement retailer. Let’s look at what they might be. 

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Falling lumber prices could spur more demand

Home Depot alluded to these volatile lumber prices in the conference call that followed the release of its first-quarter earnings on May 17. Executive vice president for merchandising Jeff Kinnaird said:

Inflation from core commodity categories positively impacted our average ticket growth by approximately 240 basis points during the first quarter, driven by inflation in lumber, copper, and building materials. Lumber prices remained volatile during the quarter. As an example, framing lumber peaked at approximately $1,300 per thousand board feet during the first quarter before falling over $400 to approximately $900.

In other words, Home Depot passed along the higher prices to consumers, who did not balk at the increase. Demand for home improvement projects has been off the charts since the onset of the pandemic. Folks who planned to spend more time at home took to customizing their living spaces to accommodate the lifestyle change. 

It will be interesting to observe if the lower lumber prices induce folks to take on more projects. Management noted that consumers have been resilient in the face of rising prices. That indicates that consumer price elasticity of demand (a metric that measures the per-unit change in consumer demand in response to a change in price) might be more muted.

Nevertheless, the fall in lumber prices is more likely a positive than negative for Home Depot. CEO Ted Decker said he expected the lower lumber prices to provide a lift in the second quarter.

HD EPS Diluted (Annual) Chart

HD EPS diluted (annual). Data by YCharts.

Do lower lumber prices make Home Depot stock a buy?

Lower lumber prices are not a reason to buy Home Depot stock. These prices remain volatile, so they could be lower this quarter and then higher again next. Overall, Home Depot is an excellent business that has made plenty of shareholders wealthier. It has grown earnings per share in the last decade at a compound annual rate of 20%.

HD PE Ratio Chart

HD PE ratio. Data by YCharts.

The stock is down 27% off its high as investors worry about a reversal of the home improvement boom since the pandemic’s onset. Trading at a price-to-free-cash-flow ratio of 28 and a price-to-earnings of 19, Home Depot’s stock is fairly valued by historical standards. So while the lower lumber prices do not make Home Depot stock a buy, a strong business at a fair valuation are excellent reasons to add it to your portfolio.