The home improvement stocks to own in 2024, according to Bernstein

Looking to 2024, Bernstein still likes home improvement stocks as it believes growth drivers are intact, namely aging housing stock, home price appreciation, and the elevated role of the home versus pre-COVID. Further, the firm sees the macro picture improving, but says it won’t be linear, and therefore remains cautious on the first half of the year. Bernstein downgraded Floor & Décor (FND) to Market Perform, while keeping an Outperform rating on Lowe’s (LOW) and a Market Perform on Home Depot (HD).

A BETTER YEAR AHEAD: Bernstein notes that 2023 was defined by declining same-store sales in home improvement, due in part to the precipitous decline in Existing Home Sales and a pullback on discretionary spending among consumers — especially big-ticket discretionary. Steep deflation in some commodity categories, notably lumber, was also a topline headwind for Home Depot and Lowe’s. Moreover, the firm doesn’t believe there’s much lingering COVID-era demand pull-forward.

Bernstein still likes home improvement stocks coming into 2024. The fundamental drivers of home improvement growth are intact, such as aging housing stock, home price appreciation, and elevated role of the home versus pre-COVID. The firm expects mid-single-digit Home Improvement market growth over a 10-year horizon, ahead of GDP and ahead of other retail/consumer sectors. It also sees the macro improving, but says it won’t be linear, and therefore remains cautious on the first half of 2024.

Additionally, Bernstein expects to see “at least a few wobbles even as disinflation continues.” Reigniting home improvement will require the combined effects of disinflation, falling mortgage rates, improving existing home sales, and rebounding discretionary spending. While the firm does not see the macro climate getting worse from here, it is more confident those trends come together by the second half of the year.

BUY LOWE’S: Bernstein raised its price target on Lowe’s to $251 from $235, while keeping an Outperform rating on the shares. The firm likes the setup for the stock entering 2024, with rebounding existing home sales and discretionary spending poised to boost DIY sales while Pro continues to deliver. Bernstein also thinks consensus is underestimating the second half of the year comp growth, and given how uncrowded Lowe’s is right now, it believes that buy-side expectations are already tempered, so good news will help more than bad news will hurt. That said, Lowe’s will likely be more of a second half of 2024 story, as the macro will have time to stabilize.

ON THE SIDELINES: Despite remaining bullish on the name long-term, Bernstein downgraded Floor & Decor to Market Perform from Outperform with a price target of $115, up from $100, as its thesis has played out and the stock’s multiple has increased. The firm now sees more downside in the multiple than upside, noting Floor & Decor is trading near its five-year high.

Meanwhile, Bernstein also raised the firm’s price target on Home Depot to $350 from $328, keeping a Market Perform rating on the shares. The firm notes Home Depot is currently trading at $355, but thinks the “multiple is going to move the other way” and therefore can’t get to an Outperform rating. At the same time, Bernstein doesn’t see enough downside in Home Depot’s EPS to endorse an Underperform rating either.