Photograph by Henry & Co.
Shares of home-improvement retailers
(LOW) took tumbles after reporting earnings earlier this week, although SunTrust Robinson Humphrey argues that the latter’s fall presents a buying opportunity.
The back story. What a difference a week makes. Before Lowe’s earnings report on Wednesday, the shares were easily striding ahead of both the market and Home Depot, with a year-to-date gain of more than 18%. However, while both Lowe’s and Home Depot stock slid post-earnings, the fall has been much harder on the former. Through Thursday’s close Lowe’s stock is now up just 2.6% in 2019 and down 1.8% in the trailing 12-month period, reversing its months-long lead over Home Depot, which is up 11.7% this year and 2.6% in the latest 12 months.
There are of course macro factors, like the trade-war jitters that have infected the market, but even with some stronger housing data, some bulls were cautious. Still, others argue that there are bigger trends on the home-improvement retailers’ side.
What’s new. On Friday, Suntrust analyst Keith Hughes reiterated a Hold rating and $180 price target on Home Depot, and a Buy rating on Lowe’s, although he cut the latter’s price target to $120 from $128.
For Home Depot, he writes that same-store sales growth has been modest this year, hurt by weather, and while there was some noise in the last quarter, he believes “underlying demand has moderated.” Given the disappointing results, Hughes thinks sales will have to accelerate if they’re going to meet management’s target of 5% growth of the year. That puts pressure on the second half of the year, although on the bright side “operating execution continues, with ongoing cost controls contributing to improved operating margin, even as investment spending increased.” Yet with limited near-term bottom-line growth, he thinks it’s best to stay on the sidelines.
On Lowe’s Hughes admits that lower margins lead to the lower full-year earnings forecast, and the fact that management blamed “insufficient pricing visibility quite honestly made the situation worse as it showed some disorganization in the turnaround.” Of course, turnarounds don’t happen overnight, but he was still disappointed to see that “a quick fix in some metrics is now a distant story.” Nonetheless, he believes that the lowered guidance “cleared the decks for future results and growth,” and with earnings-per-share growth of about 10%, Lowe’s is still ahead of Home Depot’s expected flat profit growth. That leaves him bullish on the shares, even if near-term performance may be modest.
Looking ahead. When it comes to Home Depot, it’s not surprising that investors are feeling a bit concerned: Weather has been very uncooperative this year, and while some home improvement projects are delayed, others simply never get done. That puts pressure on May sales to ramp up: At first blush, it seems that this may be the case, but until we get more detail, some may be concerned about the company’s full-year guidance given the poor trends to start the year.
At Lowe’s, the turnaround story had been an added catalyst beyond what propelled Home Depot (decent housing stats, strong consumer confidence). Yet the most recent quarter showed that, despite progress, including new management, store closures, and operational improvements, the company’s trajectory won’t be a straight shot upward. Now that the long-hanging fruit has been picked, Lowe’s has to show that its strategy goes beyond those moves, although the recent selloff certainly provides the shares with more wiggle room than they had before.
Home Depot is up 0.3% to $192.58 in morning trading, while Lowe’s is 0.4% higher to $95.19.
Write to Teresa Rivas at [email protected]