Following its third-quarter earnings report, a slew of Wall Street analysts recently raised their price targets on Lowe’s Companies (LOW -0.28%). Truist’s Scot Ciccarelli raised his target to $310 while maintaining a buy rating on the stock.
A stock for a lower-interest-rate environment
Wall Street has warmed to the home improvement sector this year, hoping to profit from a falling-interest-rate environment. As such, Ciccarelli and others see Lowe’s as a beneficiary of an improving outlook for home spending driven by lower mortgage rates and a pick-up in home sales. The latter drives sales, as homeowners typically spend on improvements to prepare for a sale or after purchasing a property.
US Existing Home Sales data by YCharts.
It’s a compelling case, but there’s reason for some caution. While the Federal Reserve has cut interest rates, market and mortgage rates have moved in the opposite direction.
30-Year Mortgage Rate data by YCharts.
History suggests that the cycle will eventually turn, and market rates will come down, but it might take longer than is implied in home improvement store valuations.
LOW EV to EBITDA (Forward) data by YCharts. EV = enterprise value. EBITDA = earnings before interest, taxes, depreciation, and amortization.
Moreover, there’s still pressure on larger-ticket discretionary item sales, and on customer transactions and sales. If you look at the trend in Home Depot‘s customer transactions, average ticket price, and comparable sales growth, you can see that these remain in negative territory. Similarly, Lowe’s expects its comparable sales to decline by 3% to 3.5% in 2024.
Data source: Home Depot presentations. Chart by author.
While Lowe’s and Home Depot are obvious ways to play the theme, their valuations suggest little upside potential to balance the risk. Consequently, better-value options might make sense, like pool products company Pentair, home appliances company Whirlpool, or roofing, insulation, and doors company Owens Corning.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool recommends Lowe’s Companies, Owens Corning, and Whirlpool. The Motley Fool has a disclosure policy.
