Lowe’s Stock Can Gain More Than 20% as It Catches up to Home Depot, Analyst Says

“Our LOW upgrade is based not on any one single factor, but rather, on a confluence of positive, and mutually reinforcing trends that we expect to continue, leading to both an acceleration of EPS growth, and also, an expansion of LOW’s multiple,” he wrote in a note to clients.

The analyst highlighted Lowe’s impressive sales growth in its Pro business, which caters to contractors. Home Depot has historically had a stronger foothold in the Pro business, but Lowe’s is starting to catch up. In the first two quarters of fiscal 2023, Lowe’s Pro sales grew at a faster clip than Home Depot’s, the Rosenblum notes, adding that he sees more growth ahead in the category.

And as Lowe’s expands its Pro business, margins are following suit. The company’s operating margin was 15.6% in the latest quarter, up from 14.4% in the previous quarter and above Home Depot’s 15.4% margin.

Home Depot has often commanded a higher valuation than Lowe’s, largely thanks to its operating margin outperformance and larger Pro sales mix, Rosenblum wrote. But now that Lowe’s is catching up on both measures, “it is increasingly difficult for us to justify HD’s multiple premium vs. LOW, and we expect the market will increasingly see the same,” he added.

What’s more, the home improvement sector might get a boost from the eventual rebound of the U.S. housing market, Rosenblum wrote. Higher mortgage rates have kept many prospective buyers on the sidelines, and in turn, they’re embarking on fewer new-home renovation projects.

“We’re comfortable with the U.S. Home Improvement (USHI) market in the near term as we think the worst is behind us,” he wrote. “And we’re solidly bullish on USHI over the medium- to long-term.”

Lowe’s’ management team is also bullish on the sector’s long-term performance. During the company’s latest quarterly earnings call, CEO Marvin Ellison pointed out that home improvement projects were mostly postponed, rather than canceled, and that there were several positive factors bolstering spend in the future.

“The aging housing stock will also drive remodel and repairs, combined with other favorable trends like millennial household formation, aging-in-place, and persistent remote work,” Ellison added.

Barron’s made a similar argument earlier this year when we named Lowe’s a stock pick. The Street seems to be split down the middle. A little more than half—54%—of analysts rate Home Depot a Buy, and 56% rate Lowe’s a Buy. Telsey Advisory Group actually downgraded both stocks in early August over concerns that it will take some time for the housing market to recover.

Shares of Lowe’s fell 1% to $230.36 in early morning trading Tuesday.

Write to Sabrina Escobar at [email protected]