Here’s what Wall Street is saying about Home Depot, Lowe’s ahead of earnings

Home improvement retailers Home Depot (HD) and Lowe’s (LOW) are scheduled to report results of their first quarters before the market open on Tuesday, May 14, and Tuesday, May 21, respectively. Home Depot’s conference call is scheduled for 9:00 am EDT on Tuesday and Lowe’s will hold its quarterly call the following Tuesday at 9:00 am EDT. What to watch for:

HOUSING MARKET COMMENTARY: Builder sentiment was flat in April as mortgage rates remained close to 7% over the past month and the latest inflation data failed to show improvement during the first quarter of 2024. Builder confidence in the market for newly built single-family homes was 51 in April, unchanged from March, according to the National Association of Home Builders/Wells Fargo Housing Market Index released on April 15. This broke a four-month period of gains for the index, which nonetheless remained above the key breakeven point of 50. “With many frustrated buyers back on the fence waiting for interest rates to fall, policymakers can help ease affordability challenges by reducing inefficient regulatory rules that raise housing costs and limit supply,” said NAHB Chairman Carl Harris.

OUTLOOK: In February, Home Depot forecast fiscal 2024 earnings per share up 1% and revenue up 1%, with comparable sales down 1%. Analysts currently expect EPS of $15.34 on revenue of $154.39B. At the time, the company said it expected “slightly less” pressure on comp sales in FY24 vs. the previous year and that it expected macro headwinds in 2024, but to a lesser degree than 2024. Lowe’s, in February, forecast FY24 EPS $12.00-$12.30 on revenue of $84B-$85B and comparable sales down 2%-3%. Analysts currently expect EPS of $12.19 on revenue of $84.38B. Also in February, Lowe’s said it expected Q1 comp sales to be “consistent” with Q4.

Citi expects the majority of hardline retailers to report Q1 results in-line or slightly above Street estimates with fiscal year guidance maintained. Stifel sees Lowe’s Q1 revenue above consensus, reflecting confidence, though also notes that its estimates reflect peak operating margin pressure constraining EPS upside. Given volatile interest rate sentiment, the firm continues to estimate “a tepid FY24 revenue performance” for Lowe’s, but notes an increasingly positive bias with the potential for a stronger performance through FY24 to drive increased confidence with underlying category drivers remaining healthy.

HOME DEPOT’S SRS DEAL: During the quarter, Home Depot announced a deal to acquire SRS Distribution, a residential specialty trade distribution company, for $18.25B, after which the company said it would suspend share repurchases until it gets back to its targeted 2.0 times adjusted debt to EBITDA. Citi said the deal fits with Home Depot’s strategy to grow with the large, complex pro, while unlocking an incremental total addressable market and increasing supply chain capabilities, the analyst tells investors in a research note. The firm also said the deal is additive to the growth profile for Home Depot and that it is the right move for the company to be addressable market focused at this point in its maturity curve.

BofA said it expects the acquisition to accelerate growth and expand Home Depot’s share of wallet with the complex pro. While not disclosed, synergies are expected to be sales-driven as Home Depot can offer its pro customers SRS’s catalog. and vice versa, BofA said.

LOWE’S SHARES DUE ‘A PAUSE’: In March, DA Davidson downgraded Lowe’s to Neutral from Buy with an unchanged price target of $270. The analyst cited valuation for the downgrade. With the stock outperforming year-to-date and Lowe’s valuation at the highest it has been since early on during the pandemic, both on an absolute and relative basis, the shares “are due a pause,” the analyst said. The firm said Lowe’s margin gap with Home Depot has narrowed five years in a row and now stands at just 90 basis points.

Meanwhile, in April, Gordon Haskett downgraded Lowe’s, saying it was “waving a yellow flag” following the rally in the stock year-to-date.

SENTIMENT: Check out recent Media Buzz Sentiment for Home Depot and Lowe’s as measured by TipRanks.