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Is Home Depot or Lowe’s the Better Buy as Home Improvement Season Kicks Off?

Posted on Monday, February 24th, 2020 by Chris Markoch

Is Home Depot or Lowe’s the Better Buy as Home Improvement Season Kicks Off?

Spring is right around the corner. And for many homeowners in parts of the nation that have grown weary of cold, gray winter days, spring turns their thoughts to outdoor projects. And this means that spring is a time when lawns aren’t the only thing seeing green.

We are now approaching the time when home improvement companies post their most significant revenues of the year. The two largest companies in the segment, Lowe’s (NYSE:LOW) and Home Depot (NYSE:HD) are scheduled to report earnings this week.

Both stocks are coming off a solid year in 2019. But which stock is the better buy now? Let’s take a closer look at each company.

Lowe’s is improving, but has work to do

Lowe’s reports fourth-quarter earnings on February 26 and analysts will be looking to see improvement from a mixed third-quarter. Overall, LOW stock kept pace with the broader market in 2019. Revenue growth in the first half of the year actually outpaced 2018 on a year-over-year basis. But the company took a step back in the third-quarter.

Although the company posted larger earnings per share (EPS) than expected, they fell short on revenue. They also fell short on same-store sales. Despite that, LOW stock got a nice boost. Most of this was because investors expected Lowe’s to post lower sales while the company was in the midst of transforming its business. The company was changing the physical footprint of its stores to help accommodate the omnichannel model (i.e. anytime, anywhere).

But Lowe’s is also aggressively trying to transform its business to become more digital friendly. In the third quarter, Lowe’s saw a 3% rise in online sales. Home Depot meanwhile saw a 22% rise. That gap has to close. And the fourth-quarter earnings report will be the first opportunity for investors to see if it has.

Home Depot needs to prove that its model is sustainable

Home Depot will deliver its fourth-quarter earnings report on February 25 and many analysts are asking Home Depot to “prove it”. The company drew the ire of investors by lowering their full-year comparable store sales forecast for 2020.

Instead of projecting sales of 4.5% to 6%, the company lowered its estimate to 4%. This was below analysts’ expectations for 4.3% growth.

Home Depot is where Lowe’s wants to go. And they’ve made a $1.2 billion investment to get there. The proof for Home Depot is whether that growth is sustainable. Analysts have a hold rating on the stock and a price target of $239.72 that marks just about a 1% decrease from current levels.

On the other hand, about sixty days ago, analyst’s had the price target at $237 and HD stock has already climbed over that. Plus, it appears the stock may have hit a bottom in December. At that time, HD stock had fallen below its 50-day moving average and was perilously close to falling below its 200-day moving average. However, since then the stock has rallied nicely and now is well above both of those benchmarks.

Both companies offer solid dividends that appear to be solid

Home Depot currently sports an annual dividend of $5.44 for a yield of 2.25%. Home Depot’s payout ratio is 46.28%. The company has a 7-year streak of increasing its dividend and has averaged a dividend increase of just over 15% for the last three years. Investors should pay attention to hear if the company announces a dividend increase. This was the same quarter last year when HD announced its most recent dividend increase of 33 cents per share.

Lowe’s offers a $2.20 annual dividend for a yield of 1.78%. The company’s payout ratio is $26.68%. Lowe’s is a Dividend King with 57 years of consecutive dividend growth. In the last three years, the company has increased its dividend an average of just over 13%. The company’s last dividend increase was announced in May 2019. This suggests that investors will probably have to wait until the company’s next earnings report before hearing about a dividend increase.

The home improvement market looks strong

Even if a report in The Wall Street Journal is correct and homeowners are choosing to stay in their homes five years longer, on average, than they were in 2010, that still bodes well for the home improvement market.  First, consumers will have to mow their lawn, plant flowers, paint rooms, and do general landscaping in any economy. And just because they are staying in their home, consumers still may want to change the appearance of that home.

Second, the home improvement sector is largely insulated from the Amazon (NASDAQ:AMZN) effect. People that need to buy mulch and fertilizer, not to mention a lawnmower, are going to go to the store to buy it. Some of this is because, in many cases, consumers may need some expert advice.

All in all it should give you confidence that it will be another strong season for home improvement stocks. Ultimately, I believe that even this sector of retail will be generating a significant chunk of its business online. At this point, I give Home Depot the edge because they are further along with their digital presence.

 


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