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Will Lowe’s Outperform Home Depot in 2020?

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So far this year, Home Depot (NYSE:HD) and Lowe’s Companies (NYSE:LOW) have outperformed the broader equity markets. Home Depot and Lowe’s have returned 16.7% and 9.4% YTD, respectively, while the S&P 500 Index has declined by 1.1%. Many businesses temporarily closed due to COVID-19 restrictions. However, Home Depot and Lowe’s stayed open since they sell essential products. Amid COVID-19, people might deviate their discretionary spending away from travel, clothing, and restaurants towards the home improvement sector. The shift could benefit Home Depot and Lowe’s. So, investors appear to be bullish on the stock.

Last month, Home Depot and Lowe’s reported their first-quarter earnings. During the quarter, Home Depot beat analysts’ SSSG and revenue expectations. However, the adjusted EPS fell short of the expectations due to increased spending on initiatives to support employees amid the pandemic. Meanwhile, Lowe’s reported an impressive first-quarter performance and beat the top and bottom-line expectations.

Home Depot and Lowe’s valuation multiples

Although analysts expect Home Depot’s sales to rise this year, they expect its adjusted EPS to decline by 3.1%. Increased expenses from initiatives to support employees and precautionary measures amid the lockdown could drag the company’s EPS down. However, analysts expect the company’s EPS to rise by 11.0% in 2021. As of June 5, Home Depot was trading at 25.7x analysts’ 2020 EPS expectations and at 23.1x analysts’ 2021 expectations. I think that the company is trading at a higher valuation multiple.

For Lowe’s, analysts expect the company to report strong EPS growth in this fiscal year and next year. Currently, Lowe’s is trading at 19.8x analysts’ 2020 EPS expectation of $6.60 and at 18.2x analysts’ 2021 EPS expectation of $7.18. These EPS expectations represent a YoY EPS growth of 14.8% in 2020 and 8.8% in 2021. Given the strong EPS growth expectations, Lowe’s is trading at an attractive valuation multiple. Let’s look at both companies’ dividend yield.

Home Depot and Lowe’s dividend yields

Home Depot has raised its dividends every year since 2010. Last month, the company announced quarterly dividends of $1.50 at an annualized rate of $6.0 per share. These dividends will be paid on June 18 to shareholders recorded as of June 4. As of June 5, the company’s dividend yield stood at 2.4% with its stock price trading at $254.90. Along with dividends, Home Depot also rewards its shareholders with share repurchases, which lowers the number of shares outstanding and drives its EPS. The company’s operating cash flows look strong. So, we can expect Home Depot to keep raising its dividends.

Lowe’s is a dividend aristocrat, which means it has raised its dividend for consecutive 25 years. The company has increased its dividends for the past 56 years in a row. On May 28, Lowe’s announced quarterly dividends of $0.55 per share at an annualized rate of $2.20 per share. The dividends will be paid on August 5 to shareholders recorded as of July 22. As of June 5, the company’s dividend yield stood at 1.7% with its stock trading at $130.97. Lowe’s also rewarded its shareholders with share repurchases.

Analysts’ expectations

Wall Street is bullish on Home Depot. Among the 33 analysts, 63.6% recommend a “buy,” 33.3% recommend a “hold,” and 3.0% recommend a “sell.” As of June 5, analysts’ 12-month target price was $250.22, which represents a fall of 1.8% from its current stock price of $254.90.

Wall Street also favors a “buy” ratings for Lowe’s. Among the 30 analysts, 83.3% recommend a “buy,” while 16.7% recommend a “hold.” None of the analysts recommend a “sell.” As of June 5, analysts’ 12-months target price was $136.92, which represents a 12-month return potential of 4.5%.

My take

The lockdown could be brutal for small players. Some stores might shut down permanently. So, after the restrictions have been lifted, I think that Lowe’s and Home Depot could gain market share from smaller players. I’m bullish on both of the stocks. However, I think that Lowe’s could outperform Home Depot. In the past few quarters, Lowe’s has underperformed Home Depot. Under the leadership of Marvin R. Ellison, Lowe’s is progressing well. The company invested to strengthen its supply chain, implemented technological advancements, grew in online sales, and implemented initiatives to attract professional customers, which increased my confidence in the stock. Also, Lowe’s is trading at a relatively lower valuation multiple compared to Home Depot.

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