Lowe's & Home Depot Diverge As Homebuilder Proxy (LOW, HD, XHB, ITB, DHI, PHM, PMI)

Lowe’s Companies Inc. (NYSE: LOW) reported earnings on Monday morning ahead of the Tuesday report from The Home Depot, Inc. (NYSE: HD).  When you look at the Lowe’s numbers and when you combine the fresh data on homebuilder sentiment, there are still just very few catalysts for a sector that has been in the toilet for years and years.  While Lowe’s and Home Depot are diverging as proxies for the building segment, there are other issues at work of interest.

The Homebuilder Sentiment for August was a repeat of 15 for the month, a reading which is still just dismal.  The most obvious issue to take over the last three weeks is that almost no sentiment readings are going to be very positive this month (and likely more).  How on earth could there be positive sentiment readings by anyone right now as the economy is slowing enough on macro-data that the “double-dip recession” is one of the top searched terms now?

The results from Lowe’s were lightly ahead on the bottom-line and slightly soft on the top-line: $0.68 EPS vs. $0.66 estimates; and $14.5 billion in sales vs. $14.75 billion expected.  The company has now put its 2011 guidance in a range of $1.48 to $1.54 EPS from a prior range of $1.56 to $1.64 EPS.  Lowe’s is down 1.4% at $19.24 against a 52-week range of $18.07 to $27.45.  The long and short is that no one could have expected a surprise win here.  How could anyone have expected positive figures if they have been reading the financial and housing news of late?

Home Depot Inc. (NYSE: HD) reports on Tuesday morning and Thomson Reuters has estimates of $0.83 EPS and $19.96 billion in revenues; next quarter estimates are $0.58 EPS and $17.17 billion in revenues.  Shares are trading around $30.90 with a 1.3% gain so far this morning and the 52-week trading range is $27.10 to $39.38.  The belief is that Home Depot is taking away from Lowe’s in the current market.

What is interesting is that despite the negative sentiment and a continued negative homebuilder climate expected for months more, SPDR S&P Homebuilders (NYSE: XHB) is higher by 1% at $14.40 and the iShares Dow Jones US Home Construction (NYSE: ITB) is up 1.5% at $9.65.

DR Horton Inc. (NYSE: DHI), one of the few building stocks with a dividend, is up 1.8% at $9.69 in late-morning trading.

PulteGroup, Inc. (NYSE: PHM) is up the second highest today as shares are up 3.5% at $4.68 on the most active trading volume of more than 5 million shares.

The most interesting move today is in the down-and-out PMI Group Inc. (NYSE: PMI).  This company is hated by borrowers who have to get home mortgage insurance, but the stock is up 25% at $0.40.  It is a penny stock and a cult stock but investors will take what they can get right now.

The woes of the building sector are going to likely be here for some time.  Many do not expect a recovery to surface before next year, while others are worried that the persistent jaw-boning in the elections in 2012 may just put the whole housing recovery off until 2013.  Regardless of the move, many underwater homes and mortgages are going be no different than Atlantis… underwater for the long-haul.  The trick to remember is that these stocks may turn even as the news just continues to look “only as bad” or just a bit “less bad” than before.  If investors are waiting for the news to show real gains, the stocks will have moved much higher by then.

JON C. OGG