This Analyst Prefers Lowe's Over Home Depot Ahead Of Earnings

Home improvement retailers are on deck to report second-quarter results and a combination of macro data and first-hand checks suggest Lowe's Companies, Inc. LOW is better positioned compared to rival Home Depot Inc HD

The Analyst

KeyBanc Capital Markets analyst Bradley Thomas maintains an Overweight rating on Lowe's with a $120 price target. The analyst maintains a Sector Weight rating on Home Depot.

The Thesis

The home improvement industry will likely show mixed results in the second quarter from multiple factors, Thomas wrote in a note. For example, lumber prices were likely 30% to 40% lower on a year-over-year basis and could impact comps by 100 basis points and erase the 1% tailwind seen in the first half of 2018.

Also, a research report from the Joint Center for Housing Studies at Harvard University painted a less bullish picture for the leading indicator of remodeling activity (LIRA), the analyst wrote.

The report revised growth expectations from 6.3% to just 0.4% in the second quarter of 2020. This may imply current concerns related to soft turnover trends, a slowdown in home price appreciation and commodity deflation are legitimate. However, recent interest rate cuts could help boost the home improvement sector.

Finally, KeyBanc's proprietary credit card data "remains positive" for Lowe's and outperformed against Home Depot in the second quarter, the analyst wrote. Coupled with CEO Marvin Ellison's turnaround plan to improve operational efficiencies, lower capital spending and improve sales productivity, the stock looks more attractive compared to Home Depot.

Home Depot is scheduled to report second-quarter results before Tuesday's market open and Lowe's will follow up with its second-quarter report Wednesday morning.

Price Action

Shares of Lowe's were trading higher by 1.96% Monday morning at $95.74, while Home Depot's stock was up by 1.91% at $207.53.

Related Links:

Analysts: Lowe's Sell-Off A Buying Opportunity

UBS Stays Bullish On Home Depot After Meeting With Management