Earnings Duel on Deck: Lowe's vs. Home Depot (LOW, HD)

This week’s earnings calendar is going to be dominated by retail earnings.  Early in the week you have the home improvement and building material wars with earnings first out of Lowe’s Companies Inc. (NYSE: LOW) on Monday and then Home Depot Inc. (NYSE: HD) on Tuesday.

We have compiled estimates from Thomson Reuters, made some key comments on what to look for in each report, shown past performance, and given some added color on what to look for ahead.  We have some concerns here about how these stocks are valued.  We also showed the relative performance for 2009, the gains since March 9 that traders use as the official end of the death spiral, and we are also showing performance since July 31.

Lowe’s Companies Inc. (NYSE: LOW) is on deck Monday morning to kick off the home improvement earnings war.  Thomson Reuters has estimates of $0.24 EPS and $11.28 billion in revenues.  For the coming fourth quarter (Jan-2010), estimates are $0.10 EPS and $9.91 billion in revenues.  Those estimates are $1.20 EPS and $46.84 billion in revenues for the fiscal year-end of Jan-2010.

As far as valuations, that puts the $21.85 share price based on Friday’s close at 18.2-times this year’s expected earnings.  If Lowe’s hits the $1.34 EPS expected for fiscal Jan-2011, then the forward year out multiple is 16.3-times next year’s earnings.  Not cheap.

Lowe’s prior guidance for fiscal Jan-2010 is as follows: “Total sales are expected to decline approximately 3%; comparable store sales to decline 7% to 9%; $1.13 to $1.21 EPS.”

As far as how these stocks have performed, Lowes’ shares are down by -2.3% since July 31.  If you use June 30 as the date, the stock is up 13.5%.  From the March 9 low this is up 61.8%.  And year-to-date, this stock is up a mere 3.3%.

Analysts have an average price target of around $24.50 on Lowe’s.  On a static basis, it seems that options traders are assigning a value for a move of up to $0.80 in either direction.  Lowe’s used its 200-day moving average as support recently and has now gone back above its 50-day moving average.  The 200-day level is $19.62 and the 50-day level is $20.93.

Home Depot Inc. (NYSE: HD), the DJIA component, is expected to report earnings on Tuesday morning.  Thomson Reuters has estimates of $0.36 EPS and $16.27 billion in revenues.  For the coming fourth quarter (Jan-2010), estimates are $0.16 EPS and $14.0 billion in revenues.  Those estimates are $1.52 EPS and $65.27 billion in revenues for the fiscal year-end of Jan-2010.

As far as valuations, that puts the $27.34 share price based on Friday’s close at 17.98-times this year’s expected earnings.  If Home Depot hits the $1.67 EPS expected for fiscal Jan-2011, then the forward multiple is 16.37-times next year’s earnings.  Also not cheap.

For a comparison, its prior guidance given in August was “The Company confirmed that it believes that fiscal 2009 sales will be down approximately 9 percent from fiscal 2008. Based on its year-to-date performance, the Company lifted its fiscal 2009 EPS guidance and now expects earnings per share from continuing operations to be flat to up 7 percent from last year. On an adjusted basis, the Company now expects earnings per share from continuing operations to decline by 15 to 20 percent. ”

Home Depot has a 6.2% gain since July 31.  If you use June 30 as the date, the stock is up 16.6%.  From the March 9 low this is up 54%.  And year-to-date this stock is up 22%.  The 52-week trading range is $17.46 to $28.44.

Analysts have an average price target of around $30.00 on Home Depot.  On a static basis, it seems that options traders are only assigning a value for a move of up to $0.60 to $0.70 in either direction.  Home Depot looks more range-bound but has also now gone back above its 50-day moving average.  The 200-day moving average is $24.43 and the 50-day level is $26.79.

Our take on both ahead of each… The hope here for the bulls in these companies is that the pent-up demand from a housing credit extension and a gradual return of the consumer will bring upside surprises to the earnings numbers.  If we see no upside to earnings then there may be some large concern on the valuations. There were no summer hurricanes to add any juice for either company.  One issue to note here is on the earnings is how low the housing manufacturing and remodel markets happens to be.  And while it is no fun to discuss a potential double-dip recession into later in 2010, these forward earnings valuations do not adequately protect investors if there are any misses.

We also have a full earnings preview in brief for each of the following retail and apparel players on deck this week in SKS, BJ, GYMB, ANN, DKS, FL, GPS, SHLD, PLCE, WTSLA, and ZUMZ.

Jon C. Ogg
November 15, 2009