Home Depot CEO Takes Medical Leave. What This Means for HD Stock Ahead of Earnings.

Investors in Home Depot (HD) stock were greeted by a surprise on Tuesday when CEO Ted Decker said he was taking a brief medical leave that will last a few months. The timing comes only days before the home improvement behemoth releases fiscal second-quarter results on Aug. 18.

But there is a key nuance here for investors. Decker has not resigned, and Home Depot has put in place two very experienced executives to split Decker's duties. Ann-Marie Campbell, senior executive vice president of U.S. stores and operations, will handle operations, while CFO Richard McPhail will handle finance and the company's Pro subsidiaries. For now, this looks more like a brief governance problem than a change to the underlying investment thesis on Home Depot.

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Next Tuesday's earnings report will also provide insight into housing affordability, consumer behavior, and demand for renovations.

Headquartered in Atlanta, Home Depot is the world's largest home improvement retailer, with 2,361 retail stores and 1,280+ SRS sites at the end of fiscal Q1. It caters to DIY customers as well as professional contractors, with the Pro division gaining increasing importance as a growth engine. Home Depot has a market cap of $342.4 billion.

Home Depot stock is down 20% from its 52-week high of $426.75 and up 18.2% from its 52-week low of $289.10. This stock has lagged the overall market in recent times, and HD is particularly vulnerable to any signs that housing and renovations will soon become more affordable.

The valuation is also far from inexpensive, despite the underperformance. Home Depot stock is trading at approximately 23.62 times forward price-to-earnings and 2.15 times sales. Therefore, the stock is valued based on the size and profitability of the company as well as its potential exposure to future housing recovery, instead of a regular retailer facing declining demand. That makes earnings growth even more important for a sustained valuation improvement.