Stock Up on Home Depot for Hurricane Season

by Dan Burrows | May 21, 2013 7:45 am

Wall Street expects solid profit improvement from Home Depot (HD[1]) and Lowe’s (LOW[2]) when they report first-quarter earnings this week, but some frigid weather and a stumble in construction might take a bite out of already sluggish sales growth.

The nation’s biggest home-improvement retailers are expecting only good things given the rebounding housing market[3] and rebuilding in the aftermath of Hurricane Sandy. And both tailwinds should continue to boost business for through the later part of 2013.

Additionally, both stocks could prove to be a highly profitable seasonal trade if this year’s hurricane forecasts are correct. As we noted recently, the Atlantic hurricane season — which runs from June 1 to Nov. 30 — is expected to be a doozy. Home Depot and Lowe’s both crushed the broader market[4] over the course of last year’s hurricane season — thanks to Sandy.

But an unusually cold winter and a drop in April housing starts could mess with the retailers’ most recent results, presenting investors with a buying opportunity.

And if you’re looking to put money to work in either of these names, then Home Depot appears to have the edge.

Home Depot’s stock is up 24% year-to-date, beating Lowe’s by 4 percentage points and the S&P 500 by 7 points. That relative outperformance looks set to continue.

 

HD Chart Stock Up on Home Depot for Hurricane Season[5]

Analysts expect Home Depot to post an 18% increase in earnings per share on 5% revenue growth when it reports first-quarter results on Tuesday.

That outsized profit growth relative to revenue gains will be driven by strong same-store sales growth, or receipts from stores open at least a year. Pulling more revenue out of the existing store base should juice profitability, analysts reckon.

“We expect [same-store sales] to continue to improve at 3% to 4%, as sales recover over the 2012-13 period. This should bring in further operating expense leverage, thereby pushing up margins,” write analysts at Trefis.

Lowe’s, on the other hand, hasn’t been able to match Home Depot’s market share gains and same-store sales growth.

The nation’s second-largest home improvement chain is expected to post solid numbers when it reports Wednesday — just not as good as Home Depot’s.

Earnings per share are forecast to rise 16% on a 2.2% increase in revenue. Same-store sales, while positive, should continue to lag those of its rival as well, with Trefis analysts seeing little change to Lowe’s sub-2% growth trend.

Both Home Depot and Lowe’s trade at premiums to their five-year averages on a forward-earnings basis. Both also have hit Wall Street’s price targets, making this week’s earnings reports possible catalysts for either upgrades or downgrades.

Given Home Depot’s stronger same-store sales and margin trends, it looks to be the better bet for an upgrade. And should the retailer disappoint or take a downgrade on valuation, the superior dividend — currently yielding 2% vs. 1.5% for Lowe’s — only bolsters the case for buying HD on the dip.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Endnotes:
  1. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  2. LOW: http://studio-5.financialcontent.com/investplace/quote?Symbol=LOW
  3. rebounding housing market: http://slant.investorplace.com/2013/05/housing-still-going-strong/
  4. both crushed the broader market: http://investorplace.com/2013/05/5-stocks-to-buy-ahead-of-hurricane-season/
  5. [Image]: http://investorplace.com/wp-content/uploads/2013/05/HD-Chart.jpg

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