Despite the revisions, it may not be wise to jump into any purchases
Oppenheimer analyst Brian Nagel has lifted his price targets on two home improvement stocks: Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW). However, he only upgraded his rating on one of the two companies and doesn’t anticipate sharp, rapid returns from either of the two stocks.
Due to high interest rates and elevated inflation, Home Depot and Lowe’s have struggled with a slump in home improvement projects during the past couple of years. However, a pivot to interest rate reductions and a gradual decline in the inflation rate could give these two U.S. home improvement giants a boost.
In any case, it might surprise you to discover which of the two companies Nagel seems to favor. Don’t jump into any hasty stock purchases, though, until you understand Nagel’s extended timeline for the recoveries of Home Depot and Lowe’s.
“Clearer skies” coming for home improvement — eventually
Perhaps in anticipation of further interest rate cuts, Nagel wrote that there are “clearer skies ahead for home improvement”. This has positive implications for Home Depot stock and Lowe’s stock, no doubt, but Nagel doesn’t necessarily expect a near-term moon shot for these assets.
“Demand trends within home improvement tend to improve as lending rates moderate, but with a potentially substantial lag,” Nagel clarified. Could this have long-term ramifications for Home Depot and Lowe’s shareholders?
Nagel seems to believe so. “As cyclical risks for home improvement retail steadily diminish, investors are apt to assume longer term posturing towards shares of Home Depot and Lowe’s,” he said.
Furthermore, Nagel envisions expanding comparable-store sales amid a more normalized backdrop for Home Depot and Lowe’s. On the other hand, he doesn’t see this occurring until “later 2025 and through 2026”.
Until then, Nagel continues “to expect top-line softness, and potential downside to Street forecasts.” The takeaway from this Oppenheimer analyst, then, may be that Home Depot and Lowe’s shareholders will need to be patient and prepared for near-term disappointment.
Which stock does the Oppenheimer analyst favor — Home Depot or Lowe’s?
Even while Nagel sees “clearer skies” coming for the home improvement/housing market, he doesn’t favor Home Depot stock and Lowe’s stock equally. As it turns out, he upgraded Lowe’s stock but not Home Depot stock.
To be more specific, Nagel upgraded Lowe’s from Perform to Outperform but he reiterated his Perform rating for Home Depot stock. Regarding 12-month price targets, Nagel raised Lowe’s stock from $230 all the way up to $305 and Home Depot stock from $345 to $400.
Clearly, Nagel sees “clearer skies” for Lowe’s than he does for Home Depot. In support of this, the analyst notes that Lowe’s operating margins have meaningfully caught up to Home Depot’s operating margins.
Despite this catch-up, Nagel observed that Lowe’s still trades at a discount to Home Depot. In support of this observation, I would note that Lowe’s GAAP-measured trailing 12-month price-to-earnings (P/E) ratio is roughly 22x, while Home Depot’s P/E ratio is approximately 27x.
Since Lowe’s operating margins have effectively caught up to Home Depot’s operating margins, Nagel expects to see the valuation gap between Lowe’s and Home Depot shrink. Again, however, this isn’t anticipated to occur very soon.
With that in mind, Nagel seems to imply that Lowe’s shareholders can either extend their holding-time horizons, or possibly just wait on the sidelines for a while. I would choose to watch and wait for further data releases from Lowe’s and Home Depot before making any decisions, instead of entering into a trade that may be too early.
