Retail

How Lowe's Is About to Steal Home Depot's Thunder

Jon C. Ogg

Published: February 5, 2018 12:55 pm

Last Updated: January 12, 2020 3:44 am

In the world of home improvement and construction supplies, investors have preferred the shares of Home Depot Inc. (NYSE HD) over Lowe’s Companies Inc. (NYSE: LOW) for some time now. If the mantra of “nothing lasts forever” is about to repeat itself, then maybe it’s time for Lowe’s to start retaking some ground from Home Depot.

It turns out that while the upside performance of the shares has favored Home Depot over Lowe’s, that has not been the case in 2018. Lowe’s stock was last seen up 9% year to date, versus 2% for Home Depot, and both stocks are up about 40% from this time a year ago.

Lowe’s is also more attractively valued at almost 18 times expected earnings, compared with 21 times for Home Depot. One area where Home Depot still wins is in the dividend yield war: 1.84% for Home Depot and 1.62% for Lowe’s.

Looking forward, Lowe’s just scored a major upgrade from Wall Street. Jefferies raised its rating to Buy from Hold with a $129 price target. That is nearly a 60% jump in the firm’s prior $81 price target, and this is now a top franchise pick for the firm. Monday’s big analyst upgrade is also on the heels of Lowe’s offering a $1,000 bonus to its 260,000 hourly employees, and after Lowe’s announced a $5 billion share buyback plan about 10 days earlier.

As far as what is driving the implied 28% upside in the Lowe’s call, Jefferies’ Daniel Binder sees Lowe’s as able to triple its earnings per share over the next five years. Changes to its board of directors are also expected to act as a catalyst to help the company close the gap with Home Depot.

Two more issues are also acting as a solid floor. One is the macroeconomic backdrop remaining firm with a strong housing economy and strong consumer. Another benefit is that the home improvement sector is seen as having a less-than-average threat from the world of e-commerce (that means the Amazon death star).

Lowe’s is set to report earnings on February 28, and Thomson Reuters is calling for $0.86 in earnings per share on $15.3 billion in revenues. That would yield roughly $68.58 billion in annual revenues and $4.51 per share in earnings for the year.

Home Depot is expected to report earnings on February 20 of $1.61 per share on $23.65 billion in revenues for its quarter. That would equate to $100.67 billion in revenue.

With Home Depot having a market cap of $233 billion and Lowe’s with a market cap of $86 billion, Home Depot’s valuation multiple is higher on sales as well (2.35 versus 1.25).

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Multiple analysts have raised their ratings and price targets on Lowe’s since the start of 2018:

• RBC Capital Markets (2/1) reiterated its Outperform rating and raised its target to $113 from $105.
• JPMorgan (1/26) reiterated its Overweight rating and raised its target price to $116 from $87.
• Telsey Advisory (1/25) raised it to Outperform from Market Perform and raised its target from $83 to $124.
• Stifel (1/25) reiterated its Buy rating and raised its price target to $124 from $103.
• Robert W. Baird (1/24) reiterated its Outperform rating and raised its target to $127 from $110.
• Bernstein (1/22) raised its rating to Outperform from Market Perform and its price target to $125 from $69.
• Barclays (1/5) raised its rating to Overweight from Equal Weight and its target to $120 from $85.

Lowe’s was last seen trading up 14 cents to $101.64, and it has a Thomson Reuters consensus analyst target price of $108.30. That consensus target was closer to $92.00 a month earlier and was under $85 just 90 days ago.

Home Depot traded down 77 cents to $193.20 a share, and it has a consensus price target of $210.45. That consensus target was about $196 just a month ago, and it was closer to $172 some 90 days ago.