Why Home Depot and Lowe's Can Both Keep Rising Into 2020

With the S&P 500 suddenly bucking against all-time highs again, many investors have to be wondering how they want to be positioned heading into 2020. With unemployment at all-time lows and with higher paychecks, there is at least some hope that Americans are going to keep spending on new homes and remodeling existing ones.

Citigroup believes that the home improvement space has room to run higher. Friday’s top analyst upgrades and downgrades featured an echo-call from Citigroup for the nation’s two leading home improvement retailers. The firm’s Gregory Badishkanian assumed coverage with higher target prices ahead.

Home Depot Inc. (NYSE: HD) was reiterated as Buy and its target price was raised to $269 from $246. The call was for solid underlying macro fundamentals and housing drivers. The analyst also sees room for delivering gains in sales and in margins. Home Depot’s consensus analyst target price from Refinitiv was last seen at $225.18, and its 52-week trading range is $158.09 to $235.49.

Lowe’s Companies Inc. (NYSE: LOW) was reiterated as Buy, with its target price raised to $137 from $122. Lowe’s was noted as making merchandise changes, as well as improving its retail store operations, supply chain and services for contractors and professionals. These are all expected to grow same-store sales and earnings. On Lowe’s, Badishkanian sees a potential rerating of its shares as it narrow’s the past performance gap with Home Depot. The consensus target price on Lowe’s was last seen at $113.72. The 52-week trading range is $84.75 to $118.23.

Badishkanian sees continued economic expansion with a strong consumer, and both home improvement giants are perceived as being more resistant to recessionary conditions than many other retail plays out there. He said of the sector: “In the home improvement space, mid-single digit sales growth is likely to be led by remodeling as the age of the U.S. housing stock continues to increase, home price are appreciating, housing turnover continues, and interest rates are low.”

Home Depot does have a slightly higher dividend than rival Lowe’s, 2.3% versus 1.9%. Citigroup is now calling for 15% appreciation in shares of Home Depot and 9% appreciation in Lowe’s, without adding in the dividends for a total return.

Home Depot’s market cap of $255 billion is nearly triple the $88 billion market cap of Lowe’s, while Home Depot’s trailing year sales figure of $108.2 billion is higher than the $71.3 billion of Lowe’s.

Shares of Home Depot were trading flat at $233.80 on Friday, and Lowe’s shares were down 0.1% at $113.75. With the year-to-date performance of almost 17% on the Dow Jones industrial average and 20.5% for the S&P 500, the 2019 performance for Home Depot has been 36%, versus 23% for Lowe’s.

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