Stock of the Week
LOW & HD
NYSE Symbol: LOW & HD
Price as of May 15th: $18.45 & $24.40
The markets have been on a good run for the last two months. One of the best performing sectors has been retail, although two retailers have been left behind, Home Depot and Lowes. Both report earnings next week. This week I'll featured both as stocks of the week. Both companies have struggled over the last couple of years as the housing market crumbled. However, as bad as things have been, both Home Depot and Lowes remain very profitable and business is showing signs of stabilizing or actually improving. Thanks to historic lows in the 30 year mortgage, with rates around 5%, this may be the best time to refinance or buy a house for a very long time. The government is pulling out all the stops to get people to buy homes. First time home buyers receive a $8000 tax benefit this year. Consumers can receive a $1500 tax credit for home energy improvements. Both Lowes and Home Depot will directly benefit from these government initiates and historic lows in mortgage rates. The stocks and their businesses should only improve over the next several years as the economy slowly improves.
The Financial Times ran an article this past week regarding the rush of U.S. homeowners to refinance mortgages at lower rates. The boom in the home lending business is prompting banks to hire thousands of new employees and put them to work on extra shifts to process mountains of paper. Lenders could originate up to $2,780 billion of new mortgages this year. U.S. homeowners could save close to $18 billion on their mortgage repayments this year if they refinance, which translates to more money to spend at Home Depot or Lowes.
This past week, Barclays made positive comments on Home Depot ahead of earnings. Friedman Billings Ramsey raised their estimates and price target on Home Depot to $30 a share. Friedman Billings Ramsey also raises their estimates on Lowes. Channel checks point to, at worse, on-plan sales trends for both companies. Standout categories that have been more favorable have been lawn and garden, as well as paint and, to a lesser extent, flooring, roofing, decks, and building and materials, and, most recently, windows thanks to the government tax credit. High-ticket areas, such as appliances and outdoor power equipment, as well as kitchen and bathroom projects, remain understandably soft. Friedman raised their 2010 estimates for both to a $1.60 for Home Depot and $1.45 for Lowes. Consensus is $1.49 and $1.27, respectively.
Based on Friedman's estimates, Home Depot is trading for 15.4 times 2010 estimates, 0.59 times sales, and 2.3 times book value of $10.48 a share. Lowes is trading for 13 times 2010 earnings, 0.58 times sales, and 1.54 times book value of $12.28 a share. Investors may want to wait until next week to see the actually earnings reports, but the future looks much brighter for two home improvement titans.