Can Lowe's Recapture Lost Ground From Home Depot With Earnings?

Retail

Published: November 18, 2019 2:56 pm

Last Updated: January 30, 2020 1:01 pm

The week of November 18 to 22 will bring several earnings that will point to the general health of the consumer. Home Depot Inc. (NYSE: HD) is set to report on Tuesday and Lowe’s Companies Inc. (NYSE: LOW) on Wednesday. One key issue that has abated is deflation in the lumber sector, and recent upticks in housing data should offer support for both companies. The real question is whether Lowe’s can regain some lost ground to Home Depot. After all, Home Depot was last seen up about 38% year to date, versus a gain of 25% for Lowe’s.

Consensus estimates from Refinitiv for the past quarter are $2.52 in earnings per share (EPS) on $27.5 billion in revenues for Home Depot. Lowe’s is expected to see earnings of $1.35 per share on $17.7 billion in revenues. For each fiscal year, the consensus estimates are $10.13 EPS and $110.76 billion in revenues for Home Depot, followed by $5.67 EPS and $72.5 billion in revenues for Lowe’s.

24/7 Wall St. has tracked several views ahead of the reports for investors to consider.

Robert W. Baird is sticking by Home Depot and Lowe’s. The firm has Outperform ratings on each, with a $230 target on Home Depot and a $135 target on Lowe’s. The firm believes that improving sector demand indicators and easy comparisons support some third-quarter sequential comparable sales acceleration at both companies. According to Baird, demand in the home improvement and housing materials is starting to pick up as most suppliers reported a sequential uptick in organic growth and expecting a modest improvement in sector demand as well. Another boost is that lumber deflation was moderating as well.

Baird also noted that further acceleration in the fourth quarter seems likely as lumber prices inflect and with prior lower rates having helped homebuilders. Company-specific initiatives also are helping both, but the discounted valuation for Lowe’s, along with a lowered bar, should help it see margin expansion and growth in EPS for a compelling risk/reward profile for Lowe’s.

For the Home Depot report on Tuesday, the firm sees EPS of $2.53 (street is $2.52) and EBIT margins down 18 basis points with a 20 basis point decline in gross margin. The firm sees an upward bias to 2019 EPS guidance of $10.03, but the consensus is already $10.13 per share.

Back on November 6, Credit Suisse maintained its Neutral rating on Home Depot but raised its target to $225 from $213. Credit Suisse noted that the set up for Home Depot and Lowe’s seems controversial and confusing for investors, with most data points and channel checks suggesting a sequential acceleration in trends. That said, the firm pointed out concerns that both retailers may be light:

As we outlined two weeks ago, we do not believe that demand has “inflected” meaningfully, but we are seeing signs of gradual improvements. Home Depot stock price seems to be pricing in a demand inflection, while Lowe’s stock is pricing in much less, with relative valuation to Home Depot near its lows, and in-line results will go a long way.

Meanwhile, CFRA reiterated its Sell rating on Monday for Home Depot with a mere $202 price target. That report talked more about the long term than just this quarterly report:

We see 3% total sales growth in FY 20, down from 6.7% in FY 19, as we think higher sales growth will be challenging given Home Depot’s size and fewer new store openings going into the slower part of the year. We also have concerns about a slower-growth U.S. economy and market uncertainties that may impact consumer spending. During Q2 FY 20, HD boosted sales with Memorial Day, Father’s Day and Fourth of July promotional sales events. We see fewer promotions ahead, unless HD lags its 4.0% same-store sales Fiscal-2020 target.

Lowe’s was last seen trading down 0.2% at $115.26, in a 52-week range of $84.75 to $118.23 and with a consensus target price of $125.71.

Home Depot traded up 0.5% to $238.55. Its consensus target price is $237.28, and its 52-week trading range is $158.09 to $238.99.