Credit Suisse downgraded the home improvement space more than a year ago amid concerns of a slowdown in home price appreciation and rising interest rates.
For the most part, these trends played out and a fresh look at the segment points to gradually improving demand for home improvement retailers — a catalyst that's priced into Home Depot Inc (NYSE: HD) but not rival Lowe's Companies, Inc. (NYSE: LOW).
Credit Suisse analyst Seth Sigman upgraded Lowe's from Neutral to Outperform with a price target lifted from $114 to $129.
Sigman maintains a Neutral rating on Home Depot with a price target lifted from $213 to $225.
Lowe's: Trough Valuation
Lowe's stock is trading at around 16.7 times 2020 EPS, Sigman said is a 20% discount to Home Depot versus a five-year average discount of 8% and a 10-year average discount of 10%. Lowe's looks to be near its trough level as management deserves credit for several strategic initiatives, including merchandising and supply chain improvements, operational efficiency, a more targeted and marketing approach.
Lowe's business could further improve from "supportive" external data-points, including improving performance in the proprietary Supplier Index, Custom Home Price Index is outperforming Home Depot markets and improving demand from the proprietary Macro Indicator.
The catalysts could also help Lowe's improve its margins through the end of 2019 with further momentum in 2020 supported by improving vendor terms, higher price and price optimization tools.
Home Depot: Difficult To Model Big Upside
Home Depot remains the best positioned company in the home improvement space, but the stock's near-term upside potential is limited after the stock's strong move higher, Sigman wrote in the note. It's difficult to model continued upside to either valuation or earnings expectations above current expectations for a 20 basis points of margin expansion.
Sigman said management may offer a more conservative outlook in terms of comp growth after a slowdown in 2019. The company could guide "somewhere in the 4% range," which marks a deceleration from the 4.5% to 6% prior long-term guidance and short of the "more aggressive" 5.0% outlook offered at the start of 2019.
Home Depot's stock is up more than 35% since the start of 2019.
Shares of Lowe's were trading higher by 0.8% at $113, while shares of Home Depot traded at $233.33.
Photo courtesy of Lowe's.