Image Source: HomeDepot.com

Home improvement retailers Home Depot (HD) and Lowe's (LOW) are scheduled to report results of their fourth quarters before the market open on Tuesday, February 20, and Tuesday, February 27, respectively. Home Depot's conference call is scheduled for 9:00 am EDT on Tuesday and Lowe's will hold its quarterly call the following Tuesday at 9:00 am EDT. What to watch for:


HOUSING MARKET COMMENTARY: Builder confidence in the market for newly built single-family homes climbed four points to 48 in February, according to the National Association of Home Builders/Wells Fargo Housing Market Index released on February 15. This is the highest level since August 2023. "Buyer traffic is improving as even small declines in interest rates will produce a disproportionate positive response among likely home purchasers," said NAHB Chairman Alicia Huey. "And while mortgage rates still remain too high for many prospective buyers, we anticipate that due to pent-up demand, many more buyers will enter the marketplace if mortgage rates continue to decline this year."

OUTLOOK: In November, Home Depot narrowed its fiscal 2023 earnings per share view to down 9%-11% from down 7%-13% and its revenue view to down 3%-4% from down 2%-5%. Analysts currently expect EPS of $15.07 on revenue of $152.53B. Lowe's, in November, cut its FY23 EPS view to $13.00 from $13.20-$13.60 and its FY23 revenue view to $86B from $87B-$89B. Analysts currently expect EPS of $13.05 and revenue of $86.18B. Lowe's now sees FY23 comparable sales down 5%, lower than its previous view of down 2%-4%.

Truist reduced its margin assumptions for FY24 and FY25 and cutting its EPS estimates for Lowe's to $12.80 and $14.20 from $13.35 and $14.75 respectively, even though over the medium term, it is becoming increasingly bullish on the home improvement sector given general spending resilience, home equity increases, easing comparisons and the recent positive inflection in Private Residential Fixed Investment data, Meanwhile, Argus said that investors who do not own Home Depot shares may look to buy on weakness in what could be a few choppy quarters for home improvement spending while consumers continue to adjust to inflation, as still-elevated interest rates make shoppers reluctant to make big-ticket purchases and as housing turnover re-accelerates. 

ANALYST FOCUS LIST: JPMorgan analyst Christopher Horvers upgraded Lowe's to Overweight from Neutral with a price target of $265, up from $210, on February 12. The analyst also added the shares to the firm's adding Analyst Focus List as a value stock idea. The analyst continues to believe Lowe's goods share of wallet headwinds are moderating with trends ultimately reverting back toward wage growth. Moreover, the company's largest category appliances is further along in the deflation process, the firm said.

CAUTIOUS NEAR-TERM STANCE: On January 22, Oppenheimer both downgraded Lowe's and Home Depot to Perform from Outperform. The analyst assumes a more cautious near-term stance towards home improvement retail. The structural underpinnings of home improvement retail remain intact and the firm stays upbeat upon longer-term prospects for the sector and leading operators, the analyst tells investors in a research note. That said, Oppenheimer is "fretting that shorter-term market positioning towards" Home Depot and Lowe's "is turning too complacent and that shares might not discount adequately for potential persistent fundamental weakness at the chains" in January of 2025. The firm says the upcoming initial 2024 outlooks "could prove unfavorable catalysts for shares." Investors looking to play prospects for strengthening trends in the sector beginning later in 2024 are likely to be presented better entry points in coming weeks and months, writes Opco.

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