Home Depot reports Tuesday BMO, while Lowe's reports Wednesday BMO
Home improvement retailers Home Depot (HD) and Lowe's (LOW) are scheduled to report results of their first quarters before the market open on Tuesday, May 18, and Wednesday, May 19, 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: Strong buyer demand pushed builder confidence up in April even as builders continued to grapple with rising lumber prices and supply chain issues and consumers faced higher home prices due to a lack inventory. The NAHB/Wells Fargo Housing Market Index released on April 15 showed that builder confidence in the market for newly built single-family homes rose one point to 83 in April. “Despite strong buyer traffic, builders continue to face challenges to add much needed housing supply to the market,” said NAHB Chairman Chuck Fowke. “The supply chain for residential construction is tight, particularly regarding the cost and availability of lumber, appliances, and other building materials."
2. 'HISTORICALLY DISCOUNTED VALUATION': On May 13, Oppenheimer analyst Brian Nagel upgraded Lowe's to Outperform from Perform with a $235 price target. The upgrade is "largely tactical in nature" and based on the prospects for a continued flow of funds into more cyclically focused equites as well as Lowe's "now historically discounted valuation" versus that of Home Depot, Nagel tells investors in a research note. The analyst, however, is "not signaling an all clear" on his "largely cautious" stance towards consumer, and in particular, shares of Covid-19 winners. He remains concerned about post-pandemic normalization in spending and more challenging comparisons.
3. STRONG CONSUMER APPETITE FOR DIY: Jefferies analyst Jonathan Matuszewski raised the firm's price target on Home Depot to $374 from $325 and on Lowe's to $247 from $200 and keeps a Buy rating on the shares as he raised his Q1 estimates ahead of the companies' upcoming earnings reports. While "stellar" Q1 reports from the major home centers may be priced in, a strong consumer appetite for "DIY" projects entering Q2 may not be, said Matuszewski, who said recent consumer searches tied to Spring projects is above last year and may suggest that Q2 consensus forecasts are too low.
4. 'ROBUST' SCENARIO INCREASINGLY LIKELY: Wells Fargo analyst Zachary Fadem raised the firm's price target on Lowe's to $225 from $210 and keeps an Overweight rating on the shares. While strong Q1 results are largely anticipated and Lowe's "robust" full year 2021 scenario appears increasingly likely, the analyst believes its likely too soon to increase the current 12% EBIT margin ceiling higher. All in, Fadem expects Q1 results to provide further evidence that the company's self-help story remains intact/robust.
Fadem also raised the firm's price target on Home Depot to $360 from $330 and keeps an Overweight rating on the shares. Based on positive industry reads, strong category trends, incremental stimulus and favorable weather, the analyst is raising his Q1 comp. While gross margin pressures could widen, COVID-driven cost pressures begin to lap, and he sees considerable SG&A leverage driving +255bps of EBIT margin expansion and $3.35 of EPS.
5. LOWE'S GUIDANCE: In February, Lowe's said FY21 revenue could approach $86B, compared to analysts' estimates at the time of $85.4B. The company said it was targeting $9B in share repurchases and $2B in CapEx in 2021.