Modern technologies and innovative products are expected to boost the home improvement industry. However, while Lowe's Companies, Inc. (LOW) could be an ideal buy, I think it could be wise to wait for a better entry point in The Home Depot, Inc. (HD).
President Biden's Inflation Reduction Act is set to benefit the home improvement industry by introducing cost savings and promoting clean energy practices.
The Department of Housing and Urban Development (HUD) has released a funding notice of over $830 million for the Green and Resilient Retrofit Program (GRRP) under the Act. Additionally, $4 billion in loan commitment authority has been allocated to this program.
Moreover, manufacturers are focusing on introducing innovative products to gain a competitive advantage. The global home improvement market is expected to grow to $423.9 billion in 2027 at a CAGR of more than 5%.
However, despite long-term growth prospects, the home renovation industry is expected to face a downturn this year, as indicated by the quarterly Leading Indicator of Remodeling Activity report by the Joint Center for Housing Studies of Harvard University. The report forecasts a significant drop of nearly 14% in home renovation spending compared to the previous year.
Additionally, the overall state of the economy and the looming possibility of a recession are causing homeowners to be more cautious about investing in large-scale renovations.
Stock to Buy:
Lowe's Companies, Inc. (LOW)
LOW operates as a home improvement retailer in the United States and internationally. The company offers a line of products for construction, maintenance, repair, remodeling, and decorating.
On April 19, LOW announced the details of rooftop solar panel installations at 174 store and distribution center locations nationwide, including 20 sites currently in operation. Once each site is completed, the solar panels will provide approximately 90% of the energy usage at each location.
LOW pays $4.20 annually as dividends. This translates to a yield of 2.07% at the current price, compared to the four-year average dividend yield of 1.62%. Its dividend payments have grown at a CAGR of 24.1% over the past three years.
Its trailing-12-month EBITDA margin of 14.63% is 34.3% higher than the 10.90% industry average. Its trailing-12-month net income margin of 6.63% is 51.5% higher than the 4.38% industry average.
LOW’s net sales increased 5.2% year-over-year to $22.45 billion in the fourth quarter, which ended February 3, 2023. The company’s gross margin increased 3.3% year-over-year to $7.26 billion, while its adjusted earnings per common share stood at $2.28.
Analysts expect LOW’s revenue for the fiscal first quarter ended April 2023 to be $21.68 billion. The company’s EPS for the same quarter is expected to be $3.45. Additionally, it has topped consensus EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 10% over the past year to close the last trading session at $203.15.
LOW’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
LOW also has a B grade for Growth and Quality. It is ranked #8 of 56 stocks in the B-rated Home Improvement & Goods industry.
To access additional ratings for LOW’s Value, Stability, Sentiment, and Momentum, click here.
Stock to Hold:
The Home Depot, Inc. (HD)
HD operates as a home improvement retailer and sells various building materials, home improvement products, lawn and garden products, and décor products, as well as facilities maintenance, repair, and operations products.
On May 18, 2023, HD announced that its board of directors declared a first-quarter cash dividend of $2.09 per share. The dividend is payable on June 15, 2023.
HD pays an annual dividend of $8.36, which translates to a yield of 2.88% on the general price level. Its dividend has grown at a CAGR of 16.1% over the past five years.
HD’s trailing-12-month gross profit margin of 33.51% is 4.7% lower than the 35.2% industry average. Its trailing-12-month Capex/Sales of 2.13% is 32.7% lower than the 3.17% industry average.
HD’s net sales declined 4.2% year-over-year to $37.26 billion in the fiscal first quarter that ended April 31, 2023. Its net earnings declined 8.5% year-over-year to $3.87 billion. Its EPS decreased 6.6% year-over-year to $3.82.
HD’s revenue is expected to decline 11.9% year-over-year to $42.23 billion for the fiscal second quarter ended July 2023. Its EPS is expected to decline 3.6% year-over-year to $4.45 in the same quarter.
The stock has declined 1.9% over the past three months to close the last trading session at $290.66.
The stock has an overall C rating, equating to a Hold in our proprietary rating system.
HD also has a C grade for Growth, Sentiment and Momentum. It is ranked #30 in the same industry.
Click here to see the additional POWR Ratings for HD (Sentiment, Momentum, Growth, and Value).
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LOW shares were trading at $208.08 per share on Tuesday morning, up $4.93 (+2.43%). Year-to-date, LOW has gained 5.50%, versus a 9.63% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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