Home improvement retailers Home Depot (HD) and Lowe's (LOW) are scheduled to report the results of their third quarter before the market open on Tuesday, November 17, and Wednesday, November 18, respectively. Home Depot's conference call is scheduled for 9:00 am EDT on Tuesday and Lowe's will hold its quarterly call on Wednesday at 9:00 am EDT. What to watch for:

1. HOUSING MARKET COMMENTARY:

 Builder confidence in the market for newly-built single-family homes increased two points to 85 in October, further surpassing the previous all-time high of 83 recorded in September, according to the NAHB/Wells Fargo Housing Market Index. These are the first two months the index has ever been above 80. “Traffic remains high and record-low interest rates are keeping demand strong as the concept of ‘home’ has taken on renewed importance for work, study and other purposes in the Covid era,” said NAHB Chairman Chuck Fowke. “However, it is becoming increasingly challenging to build affordable homes as shortages of lots, labor, lumber and other key building materials are lengthening construction times.”

2. GORDON HASKETT PREFERS HOME DEPOT OVER LOWE'S:

 Gordon Haskett analyst Chuck Grom upgraded Home Depot to Buy from Accumulate with a $315 price target. He remains constructive on the home improvement space and expects "very strong results" from both Home Depot and Lowe's when both report Q3 EPS. Moving to 2021, his expectation is that the pendulum shifts back in favor of the Pro business and "do-it-for-me" over "do-it-yourself," which should lend to better-operating margin dollar flow through for Home Depot relative to Lowe's, prompting his decision to move Home Depot ahead of Lowe's in his ratings structure, said Grom. Grom downgraded Lowe's (LOW) to Accumulate from Buy with an $181 price target.

3. NEAR-TERM RISKS: 

Oppenheimer analyst Brian Nagel downgraded both Home Depot and Lowe's to Perform from Outperform with price targets of $305 and $180, down from $320 and $185, respectively. Over the near term, the analyst is "increasingly concerned" that the market is becoming "too lax" toward chances of a post-COVID-19 sales growth downshift. Nagel is "concerned somewhat" that the recent outsized comp gains within home improvement might to some extent reflect a demand-pull forward, thereby impacting sales of durables and other items through 2021. As such, the analyst sees more modest upside in both stocks going forward. With that said, the favorable intermediate to longer-term stance for Home Depot and Lowe's is unchanged, Nagel tells investors in a research note.

4. ACQUISITION OF HD SUPPLY:

 Home Depot announced Monday that it agreed to acquire the remaining shares of HD Supply Holdings (HDS) for $56 per share in a deal valued at about $8B. "HD Supply complements our existing MRO business with a robust product offering and value-added service capabilities, an experienced salesforce that enhances the strong team we have in place, as well as an extensive, MRO-specific distribution network throughout the U.S. and Canada," said Home Depot CEO Craig Menear. Lowe's previously said it was not in discussions to acquire HD Supply.

5. DIY TO CONTINUE TO SURGE:

 In September, Loop Capital analyst Laura Champine said her updated valuation model assumes that DIY activity will continue to surge due to COVD-related home improvement spending trend as consumers recognize that their homes will need to serve more functions than they have historically. Champine projects that consumer spending on home improvement will remain above historical levels for "many more quarters" while noting that Lowe's tight inventory management should also limit discounting.