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Home Depot and Lowe's: Will There Be Momentum in 3Q17?

PART:
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Part 8
Home Depot and Lowe's: Will There Be Momentum in 3Q17? PART 8 OF 9

Home Depot and Lowe’s Valuation Multiples Compared to Their Peers

Valuation multiple

For our analysis, we have chosen the forward PE (price-to-earnings) multiple due to high visibility in Home Depot (HD) and Lowe’s (LOW) earnings. The forward PE multiple is calculated by dividing the company’s stock price by analysts’ earnings estimates for the next four quarters.

Home Depot and Lowe&#8217;s Valuation Multiples Compared to Their Peers

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PE multiple

The better-than-expected 2Q17 earnings and the expectation of sales growth due to recovery efforts after Hurricane Harvey and Hurricane Irma caused Home Depot’s forward PE multiple to rise. As of September 26, 2017, Home Depot was trading at a forward PE multiple of 20.3x—compared to 19.9x before the announcement of its 2Q17 earnings on August 15, 2017. Home Depot, the largest home improvement retailer in the world, has greater bargaining power. As a result, Home Depot has higher margins than its peers. The company has been able to trade at a higher valuation multiple than its peers.

Although Lowe’s 2Q17 earnings were lower than analysts’ estimates, the expectation of sales growth due to recovery efforts helped the company’s stock price and valuation multiple rise. As of September 26, 2017, Lowe’s was trading at 16.2x—compared to 15.2x before the announcement of its 2Q17 earnings.

On the same day, Bed Bath & Beyond (BBBY) and Williams-Sonoma (WSM) were trading at a forward PE multiple of 8.1x and 13.2x, respectively.

Growth prospects

For the next four quarters, analysts expect Home Depot and Lowe’s to post EPS (earnings per share) growth of 11.6% and 11.1%, respectively. The EPS growth could have been factored into the respective companies’ current stock price. If the company posts earnings that are lower than analysts’ estimates, the selling pressure could bring down the company’s stock price and its valuation multiple.

Next, we’ll discuss Home Depot and Lowe’s target price and analysts’ recommendations.

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