Baird Says 'Stay Long' Home Depot And Lowe's Ahead Of Q4 Results

Home Depot Inc HD and its closest peer Lowe's Companies, Inc. LOW are on deck to report their respective earnings results.

Peter Benedict of Baird commented in a report Census data showed industry wide sales growth slowed in the quarter to 4.5 percent in November and December from 5.5 percent in the third quarter.

Benedict argued this shouldn't be a surprise to investors given the difficult year-ago comparisons, but investors should also keep in mind that "steep" compares loom in the first quarter.

Nevertheless, the sector is expected to remain hot throughout the year and consensus estimates for both companies reflect what the analyst described as a "reasonable" base-case scenarios.

"We think the sector will remain a pocket of strength within retail given a still-favorable housing backdrop (turnover, home price appreciation, household formation), continued share gains, Pro initiatives, and omni/in-home selling efforts," Benedict wrote.

Related Link: Will Home Depot Address NAFTA Negotiations On Its Q4 Conference Call?

Home Depot & Lowe's Estimates

Home Depot, one of the hottest Dow components over the years, will report its results next Tuesday and Benedict is projecting the do-it-yourself retailer to earn $1.32 per share but comps are expected to slowdown to 3.5 percent from 5.9 percent in the prior quarter.

Benedict estimates Lowe's will earn $0.79 per share in the quarter but unlike Home Depot, comps of 2.3 percent are expected to remain stable from 2.6 percent in the prior quarter.

What To Do With The Stocks

Benedict is arguing investors stay long both Home Depot and Lowe's ahead of the earnings print. The analyst cited an attractive valuation as the group's relative valuation versus the S&P 500 index is near multi-year lows (Home Depot at 1.09x and Lowe's at 0.93x versus a five-year average of 1.25x and 1.17x, respectively).

Among the two stocks, Home Depot remains a "cleaner story" with better fundamental momentum but Lowe's stock carries "some appeal for investors with a more value bent."

Shares of Home Depot remains Outperform rated with a $150 price target while shares of Lowe's remain Outperform rated with an $85 price target.