Home Depot Chief Financial Officer Richard McPhail couldn’t ignore a tough reality on the retailer’s recent earnings call: rising interest rates are forcing customers to shy away from big projects. “There’s a weird irony to everything you read… ‘They’re going to go down soon,'” McPhail said when speaking to investors on an earnings call in May, referring to the future Expectations of falling interest rates. Lowe’s echoed this sentiment when it announced first-quarter results on May 21. Hiring a contractor for the project. Lowe’s CEO Marvin Ellison told investors: “Uncertainty about interest rate cuts, stubborn inflationary pressures and consumers’ continued preference for discretionary spending on services and experiences continue to impact DIY home improvement demand. Home Depot said 1,000 in the first quarter Sales of tickets over $500 were down 6.5% from a year ago, and Lowe’s saw customers deal with a much smaller range of DIY items that were $500 or more. Project. How long this trend will continue is unclear, but clearly a lot will depend on the direction of interest rates. Although the Fed has hinted that a rate cut is possible this year, the market does not expect it to happen for several months as inflation remains high. There will be interest rate cuts. Analysts say that will continue to weigh on Lowe’s and Home Depot stocks. Still, when the Fed begins to ease monetary policy and consumers exercise some pent-up demand, some think patient investors will. Opportunity. HD LOW YTD mountain Both Home Depot and Lowe’s have underperformed the market this year, KeyBanc analyst Bradley Thomas said in a research note on Tuesday. to valuations and ‘secular higher’ interest rate dynamics, we continue to believe near-term (6-12 months) upside to the share price may be limited. “but [we] Lowe’s will be a long-term beneficiary once depressed housing conditions recover. .Recommend Home Depot [same-store sales growth] “This dynamic is not surprising, given the stress the high-interest rate environment is putting on consumers. For example, average interest rates on credit cards have hit all-but a May 8 report from real estate data firm ATOM shows that homeowners Some home owners have more equity than they did before the pandemic, which could allow homeowners to feel wealthier and more confident to buy a larger home or borrow against it when interest rates drop, fund a new deck or update a bathroom. “Rising interest rates are causing clients to delay their large discretionary projects,” UBS analyst Michael Lasser said. “This means that as interest rates move lower, the economic recovery should be strong. The analyst maintained a buy rating on the stock but lowered his price target to $400 a share from $411 after Home Depot reported earnings. Lasser’s forecast implies room for a 23% upside going forward. Melich said, Consumers are currently forced to make only absolutely necessary repairs. He said some are “cutting back” or looking for cheaper alternatives in terms of materials and overall project scope. “Life happens and families form,” Melich said. “At some point, [people] Must accept that this is the price [and] Melich said a surprising element of Home Depot’s first-quarter results was that despite price cuts on large items, consumer engagement with the products remained high. It could be a good sign that Melich thinks there’s an opportunity for investors to buy the stock “at market multiples amid depressed earnings.” Homeowners will update their homes. twenty three%. Home Depot leads Lowe’s in the specialty category, with about half of its business coming from professionals, compared with 20% to 25% for Lowe’s. With Lowe’s stock languishing so far this year, Home Depot is planning to expand into the specialty dealer segment by acquiring specialty dealer SRS, the company’s biggest move yet to capture the market, Home Depot CEO Edward Decker said. a larger share of what Edward Decker calls a $250 billion market. Still, Lowe’s efforts to capture market share among professionals appear to be gaining traction. Its professional segment grew slightly in the first quarter, helping to offset troubling losses in the DIY business. KeyBanc’s Thomas said the positive change comes as Home Depot is seeing negative same-store sales in its specialty stores. Under Allison’s leadership, Lowe’s has also been focused on improving customer engagement and e-commerce. “In addition to private label, management expects to continue developing the Pro program while taking several new Pro-related actions, such as converting LOW’s Pro cardholders to the company’s new Pro loyalty and credit program and launching New online tools allow professionals to create and update online quotes from anywhere,” Thomas said. Analysts polled by FactSet predicted on average that Lowe’s shares could rise about 17% from Friday’s closing price. Lowe’s Ellison said recently: “While the near-term remains challenging, we remain confident in the medium- to long-term outlook for the industry as our core demand drivers all support growth.”
Rising home equity levels could help spur pent-up demand for these two stocks
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