Why Analysts See Home Depot and Lowe’s Heading Even Higher After Earnings

The nation’s two largest home improvement stores, Home Depot Inc. (NYSE: HD) and Lowe’s Companies Inc. (NYSE: LOW), both reported first-quarter results last week and both hammered estimates. The showing was particularly welcome because retail earnings in the first quarter have disappointed, especially among department stores.

Why are consumers spending money on wood floors and paint and not on clothes? Retailer Urban Outfitter’s CEO Richard Hayne says, “Simply put, America is overstored and overstocked.” That means that price promotions rule the day, and in those cases almost no clothing retailer can win. Urban Outfitters Inc. (NASDAQ: URBN) posted a profit in the first quarter, but revenues and profits were driven by the company’s non-clothing divisions.

Sales of existing homes rose in April for the second month in a row, according to the National Association of Realtors, but the inventory of existing homes for sale is low and falling. The inference is that people are not buying but renovating, and there is at least some evidence for that.

Whatever the reason, the successes at Home Depot and Lowe’s are welcome. Here are some analysts’ moves following last week’s earnings reports.

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Home Depot was reiterated as Outperform and the price target was raised from $145 to $147 at Credit Suisse. Other changes included:

• Argus reiterated the stock as a Buy and raised its price target from $145 to $150.
• Merrill Lynch reiterated a Buy rating and raised its price target from $155 to $158.
• Citigroup raised its rating to Buy.
• Deutsche Bank reiterated a Buy rating and raise the price target from $135 to $145.
• Oppenheimer reiterated an Outperform rating with a $150 price target.

Lowe’s was not left out of the price target increases. The analysts at Oppenheimer, for example, maintained their Outperform rating on the stock and raised the price target from $77 to $85. Other changes included:

• BMO Capital Markets raised its price target to $85 and rates the stock Outperform.
• Deutsche Bank rates the stock a Buy and raised the price target from $80 to $86.
• UBS also rates the stock a Buy and raised its price target to $88.

Home Depot shares closed Friday at $131.85, in a 52-week range of $92.17 to $137.82. The consensus price target on the stock is $147.52, and the high target is $158. Not all the new targets may be included in the consensus yet.

Lowe’s stock closed Friday at $79.82, in a 52-week range of $62.62 to $80.33, and the high was posted Friday. The consensus price target is $86.43 and the high target is $94. Again, not all recent changes may yet be included in the consensus calculation.