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Home Depot (HD) and Lowe’s (LOW): Tooled Up and Ready to Hammer Earnings

Sorry, Tim Allen: Lowe's and Home Depot stock don't need much fixing

With a rash of industries losing substantial value in an unforgiving second-quarter earnings season, investors are scrambling to find any winners left in the market.

It’s been a Sisyphean task.

The benchmark S&P 500 index is up only a little over 1% year-to-date, and is down more than 2% from its May record high. A much-needed reprieve, fortunately, comes in the form of home improvement stocks such as Home Depot (HD) and Lowe’s (LOW).

While home improvement certainly isn’t sexy, nor is it wildly profitable like the highflying biotech industry, it rarely exhibits the volatility of unbridled bullishness.

This is evident by the fact that over the past 15 years, on a month-over-month performance average, home improvement stocks have consistently beaten the S&P 500.

LO, HD, SP500, returns
Source: Source: JYE Financial, unless otherwise indicated

In particular, home furnishings juggernaut Home Depot has outperformed the S&P 500 11 times in the past 15 years, while HD’s primary competitor Lowe’s (LOW) has bested the benchmark 10 times.

Cumulative strength for the three are also vastly different. Since 2000, HD maintains a monthly performance average of 0.76%, while LOW is up at 1.24%. On the other hand, the S&P index can only muster 0.28%.

The question on most investors’ minds, however, is whether HD and LOW can repeat their respective exploits from last year. In 2014, Home Depot stock shot up nearly 31%, an impressive showpiece bested by its rival, as Lowe’s stock turned in at nearly 42%.

But this year, the collective momentum has slowed. Home Depot stock is off a bit, but still maintaining a respectable pace at 13% year-to-date, while Lowe’s stock suddenly got volatile in April, and is currently up only 4.7%.

Concerns of economic weakness (personified in reduced consumer confidence for July 2015) have yet to filter down to home improvement stocks. Both HD and LOW have recorded consistent top-line growth, and their respective current-year revenues are up an average of about 8% against results from the past two years.

The main difference between the two is that Home Depot has kept better control of its business and administrative expenses than Lowe’s, giving HD higher efficiency in its books.

Additionally, Longbow Research analysts are bullish on the two, citing a ramp-up in demand in June and July as likely factors to overcome initial weakness for the second quarter. Factor in a probable increase in sales of high-dollar items and growth in foot traffic, and the idea that HD and LOW can at least meet their earnings expectations is fairly sound.

LO, HD, earnings performance
Source: Source: JYE Financial, unless otherwise indicated

In recent trades, however, historical earnings performance has been mixed, something that the management teams for the Depot and Lowe’s will eagerly correct. In the last five earnings reports, both HD and LOW registered three beats and two misses against Wall Street consensus.

The market, however, has been more forgiving in that time frame, with Lowe’s and Home Depot stock rising up an average of 1.76% a month following earnings release. And since Q1 FY2013, the month following earnings netted HD and LOW average returns of 2.44%, demonstrating investor confidence toward these marquee names.

All in all, the broad retail sector has been very ugly, but fundamental stability and consistent revenue growth should continue to serve Home Depot and Lowe’s stock holders well into the future.

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

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