Lowe’s or Home Depot: Which Should Investors Prefer in Q3?

  • Analysts’ estimates indicate that Lowe’s will outperform Home Depot with its EPS growth rate in the third quarter.
  • Lowe’s stock trades at a lower valuation multiple with a healthy EPS outlook.

Lowe’s (LOW) and Home Depot (HD) will report their third-quarter earnings soon. We think that Lowe’s bottom-line growth will accelerate sequentially and mark stellar growth in the third quarter. Analysts’ consensus estimates indicate that the company will likely outperform Home Depot with its EPS growth.

Analysts expect Home Depot to post an EPS of $2.53 in the third quarter, which implies YoY (year-over-year) growth of about 1%. Soft margins and higher taxes will likely limit Home Depot’s bottom-line growth in the third quarter. Home Depot will report its third-quarter earnings on Tuesday.

In comparison, analysts expect Lowe’s to post an adjusted EPS of $1.35 in the third quarter, which implies YoY growth of about 30%. The growth projection is well above analysts’ expectations for Home Depot.

What could drive Lowe’s earnings in Q3?

Lowe’s third-quarter EPS will likely gain from healthy top-line growth and expense leverage. Management expects the top line to continue to benefit from the improved macro backdrop. The low unemployment rate, higher wages, and increased spending on housing maintenance and repair will likely to support sales.

Analysts expect Lowe’s to post revenues of $17.68 billion in the third quarter, which reflects YoY growth of 1.5%. Similar to Home Depot, Lowe’s top line could take hit from lower lumber prices.

The company’s margins will likely show a sequential improvement, which would boost its bottom-line growth. Pricing action and strategic promotions could support the margins. However, shrink and higher supply-chain costs could continue to hurt the company.

Lowe’s bottom line will likely gain from margin expansion and accelerating share repurchases. The lower outstanding share count could drive the company’s bottom line in the third quarter. However, a higher tax rate could remain a drag.

In comparison, Home Depot’s margins could stay low in the third quarter, which would impact the EPS growth. The YoY increase in the tax rate could also remain a drag.

Lowe’s will report its third-quarter earnings on Wednesday.

Lowe’s stock looks attractive on the valuation

So far, Lowe’s stock has underperformed Home Depot this year. The stock has risen 25.1% on a YTD (year-to-date) basis as of November 15. In comparison, Home Depot stock has risen 38.1% during the same period.

However, Lowe’s low valuation and healthy EPS growth make it attractive before its third-quarter earnings. The stock trades at a forward PE ratio of 18.5x, which well below Home Depot’s forward PE ratio of 22.5x.

Analysts expect Lowe’s to post EPS growth of 11.2% in 2019. The EPS growth is expected to accelerate in 2020. Analysts forecast 17.4% growth in Lowe’s 2020 EPS.

In comparison, analysts expect Home Depot’s bottom line to increase 2.5% in 2019. Meanwhile, the 2020 EPS will likely increase 8%.

Analysts remain upbeat 

Wall Street remains upbeat on Lowe’s and Home Depot stock. For Lowe’s, 24 out of 32 analysts recommend a “buy,” while eight recommend a “hold.” Analysts have an average target price of $125.71 on Lowe’s stock, which implies an upside of 8.8% based on its closing price of $115.52 on November 15.

For Home Depot stock, 20 out of 34 analysts recommend a “buy,” 13 recommend a “hold,” and one recommends a “sell.” Analysts’ target price is on par with its closing price of $237.29 on November 15.