May 25, 2022

Renovate Your Portfolio with these 2 Home Improvement Stocks

4 min read

A lot is happening in the vast housing market presently — with rising mortgage rates, soaring property prices, sky-high housing demand, and new constructions picking up. The only thing that the sector is short of seems to be housing itself. While everything looks up from the outside, this situation is not sustainable and is not expected to last for a long time before housing demand calms down in response to the high mortgage rates and prices.

Moreover, new constructions are also doomed to face obstructions from supply issues, rising lumber costs, and obtaining building permits. Also, the dilemma of how much inventory to build in order to avoid excess unsold inventory when the demand declines is another thing to think about.

However, there is one area within the housing sector that is keeping the noises out of the room — home improvement.

A Thriving Home Improvement Industry

Presently, the market is short of new homes as the demand has increased faster than supply. However, the demand for more spaces to accommodate new lifestyle changes such as a work-from-home station or online learning setup needs to be fulfilled regardless. What is the next best thing to buying a house? The answer is home improvement.

Again, higher mortgage rates and soaring home prices are not expected to have any significant effect on home improvement demand, a thought corroborated by home improvement giant Lowe’s (NYSE: LOW).

Looking at the home improvement industry from another viewpoint, the increase in wages and rise in employment in the U.S. economy has made it more affordable for consumers to invest in home restructuring and redesigning.

Statista found that in 2021, sales of home improvement products and services in the U.S. reached $538 billion, and are expected to cross $620 billion by 2025.

The only glitch, however, are the supply chain constraints, increasing interest rates, and high lumber prices, that can be expected to dent home improvement sales.

Can the two biggest home improvement retailers — Lowe’s and Home Depot (NYSE: HD) overcome these setbacks and make the most of the present environment, which is looking mostly favorable for home improvement?

Home Depot Versus Lowe’s

Let us start the discussion by looking at some inputs from Statista. It was found that in 2021, customers spent approximately $96 on an average per visit to Lowe’s, whereas in Home Depot, they spent an average of around $83 per visit.

However, that doesn’t necessarily mean that Lowe’s is a better choice among consumers. In another survey, Statista found that in 2021, around 1.8 billion transactions were made at Home Depot, which was an increase year-over-year. Meanwhile, Lowe’s recorded a little more than 1 billion transactions in the same year, which was a marginal decrease compared to 2020.

These statistics show that both the retailers are neck-and-neck in competition. However, when it comes to investing in the companies’ shares, we must take into account other factors.

Which One to Invest in?

In the last reported quarter, both the companies reported higher year-over-year comparable sales. Moreover, both Lowe’s and Home Depot saw higher sales growth to home improvement professionals than do-it-yourself customers. This is important because Pro (professional) customers are more profitable than DIY customers as they are recurring, and buy more tools per transaction.

Another boost that the companies are getting is from DIY customers who started their home improvement projects but are now seeking to entrust those to professionals.

When it comes to professional customers, however, Home Depot’s Pro sales are higher than Lowe’s. This is an area of improvement in which Lowe’s is focusing on.

Importantly, Lowe’s upgraded its 2022 sales guidance whereas Home Depot also expects slight growth in comparable sales.

Wells Fargo analyst Zachary Fadem reiterated a Buy rating on the LOW stock with a price target of $260. “We see compelling value for a leading retailer with attractive category dynamics, idiosyncratic growth and structural margin improvement,” said Fadem last month.

Then again, Fadem reiterated a Buy rating on Home Depot also, based on calculations that indicate that rising interest rates will bring down home improvement valuations. This prompted the analyst to slash his price target to $350 from $400, despite the optimistic rating.

However, Lowe’s currently trades at 1.48x sales, which is lower than HD’s multiple of 2.15x sales, which makes Lowe’s valuation slightly more attractive.

Regarding Wall Street sentiments, both the companies have Strong Buy consensus ratings. Home Depot enjoys 16 Buys and three Holds, whereas Lowe’s has nine Buys and three Holds.

The average Home Depot price target stands at $373.41, indicating a 21.47% upside from Monday’s early price levels. On the other hand, Lowe’s stock price predictions point at an average price target of $259.18, indicating an upside of 27.42%.

Ending Note

The home improvement industry has bright prospects for the coming year. In this environment, the two undisputed leaders in this space, Home Depot and Lowe’s, stand to benefit immensely.

Both companies have more upsides to their business than downsides. Moreover, both LOW and HD are currently trading at attractive valuations and have the potential to generate healthy returns if scooped up before prices rise.

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