Market Gears Up For Home Depot, Lowe’s Earnings
Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW) are among the biggest winners of the pandemic gaining not only a sustained increase in business but pricing power that has so far been able to stave off the worst of the cost pressures. With the two both slated to report earnings next week, it’s worth noting the analyst's activity has been picking up for both companies. What this means to us, and for the market, is a near-term bottom that could very easily turn into a reversal. Assuming no news comes between now and then, we see these stocks moving to the side and then possibly springing higher under the influence of strong results and positive commentary from the analysts.
The Analysts Are A Little More Bullish On Lowe’s
Pricetargets.com data shows the analysts are bullish on both companies rating them a firm Buy but there is a noticeable difference in the most recent commentary. Both companies have received three analysts' notes in the last month but Lowe’s are decidedly more bullish. Lowe’s three include 1 upgrade to Buy from Neutral and two price target increases on top of reiterated Buy/Overweight ratings. In the case of Home Depot, the three analysts' notes include 1 reiterated Buy, 1 upgrade to Buy, and one lower price target.
The difference in opinion can be seen in the price targets as well. Both companies are looking at 20% to 22% upside relative to their consensus targets but the underlying trend in the consensus is what matters. Both Marketbeat.com consensus estimates are up over the last 30-day, 90-day, and 1-year periods but Lowe’s is up 55% compared to only 44% for Home Depot but there are other factors in play as well.
Turning to the institutions and their support of the stock, both carry high institutional ownership ratios in excess of 70% but there is once again a notable difference. The institutions hold only 70% of Home Depot while holding close to 74% of Lowe’s and net activity in the two markets is the opposite. The institutions have been buying Home Depot while selling Lowe’s over the past year suggesting rebalancing, as well as profit-taking, is affecting market dynamics. Institutional activity has been strong so far in 2022 and maintaining these trends.
Lowe’s Is Still A Better Value Than Home Depot
Looking at the two from the yield-to-value perspective, and assuming they’re both good company’s positioned to outperform, Lowe’s is the better choice. While Home Depot yields a more robust 1.88% compared to Lowe’s 1.42% the outlook for dividend growth is much better and Lowe’s and it trades at a discount. Home Depot trades at 22.6X its earnings while paying out 45% of those earnings as dividends. That’s a good ratio and backed up by 12 years of increases and a 19% CAGR. Lowe’s, on the other hand, trades at 18X its earnings while paying out only 25% in dividends. The CAGR is comparable at 18% which means to us that Lowe’s will be able to sustain larger dividend increases for longer and that should help it outperform Home Depot over the long-term.
The Technical Outlook: The Bottom Is In, For Now
Shares of HD and LOW corrected to trend and/or the 150-day moving average and now appear to be forming the base for a trend-following bounce. Assuming the earnings results are consistent with our outlook we see these stocks moving up to retest recent highs and possibly breaking out to new highs. We also see shares of Lowe’s outperform Home Depot.
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