Which Is A Better Investment For Home Improvement Sector: Home Depot Or Lowe's?

Traders didn’t exactly love Home Depot Inc HD's second-quarter earnings, and the stock is down about 2.7 percent since reporting on Aug. 15. However, Credit Suisse analyst Seth Sigman liked what he saw and sees positive implications for both Home Depot and Lowe’s Companies, Inc. LOW in the second half of the year.

For Home Depot, Sigman raised his full-year EPS guidance from $7.26 to $7.34, as Q2 EPS and margins came in better than expected.

“The key takeaway from Q2 was the very strong demand, growth in big projects, progress in its initiatives to diversify its business, and the expectation for stronger operating leverage in 2H,” he wrote on Monday (see his track record here).

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Lowe’s is expected to release its quarterly report before the market open Wednesday, and Sigman expects a mixed report. Based on Home Depot’s numbers, Credit Suisse is calling for year-over-year sales comps to grow 3.5 percent, well short of consensus estimates of 4.3 percent. However, Sigman anticipates that Lowe’s will be able to hit consensus EPS expectations via expense management and buybacks. As a result, he believes full-year comp guidance could be at risk, but full-year EPS estimates may be safe.

The Outdoor category should be particularly strong for Lowe’s this quarter based on improving numbers from Home Depot in the second quarter. Favorable weather conditions helped boost Outdoor sales, which account for roughly 40 percent of Lowe’s business.

The good news for home improvement investors is that Sigman sees more upside ahead for both Lowe’s and Home Depot. Credit Suisse maintains Outperform ratings on both stocks with a $94 price target for Lowe’s and a $171 price target for Home Depot.