The Street Deconstructs Home Depot, Lowe's Earnings

Do-it-yourself home improvement retail rivals Home Depot Inc HD and Lowe's Companies, Inc. LOW reported first-quarter results last week. Here's how some of the Street's top analysts reacted to the reports.

The Home Depot Analysts

Piper Sandler analyst Peter Keith maintained a Neutral rating on Home Depot, price target lifted from $231 to $244.

BofA Securities analyst Elizabeth Suzuki maintained at Neutral, price target lifted from $238 to $250.

Raymond James analyst Matthew McClintock maintained at Outperform, price target lifted from $245 to $250.

Piper Sandler's Key Takeaways On Home Depot 

Home Depot reported a "strong" first-quarter report, highlighted by a comp growth beat of 6.4%, while comps accelerated to double-digits in May, Keith said in a note.

The company saw some incremental expenses due to the COVID-19 pandemic, but it also showed strong underlying expense leverage, the analyst said. 

Looking forward, Home Depot doesn't expect to report negative comps in any quarter in 2020 as it benefits from consumers spending less money on restaurants, travel and entertainment, he said. 

Piper Sandler's revised $244 price target is based on expectations for the company to establish itself as a beneficiary of increasing spending on home categories, even if the U.S. remains in a recession for the rest of the year, Keith said.

A Neutral stance remains in place for valuation reasons, according to Piper Sandler. 

BofA Says Home Depot's Strong Comps Won't Last

Home Depot's comp growth of 6.4% in the first quarter exceeded expectations of 5% as average ticket rose 11%, Suzuki said in a note. The company likely benefited from consumers "being stuck at home" and spending money on home improvement projects, the analyst said. 

Some of the purchases were likely pulled forward as more consumers return to work in the second and third quarters and any stimulus benefits will "wear off," she said.

The expectations for momentum seen in the first quarter are not likely to last moving forward, according to BofA. 

Raymond James: Doing More In A 'Tough Environment'

Home Depot deserves credit for shifting a business of its size to serve customer needs, such as contactless curbside pickup, McClintock said in a note. The company is also heavily focusing on digital, and this will serve as a competitive advantage moving forward, the analyst said. 

The retailer did a good job at managing its expenses while simultaneously investing "aggressively" in its One Home Depot strategic initiatives and its workers, he said. 

"Bigger picture, we believe HD is well positioned to outperform in what will likely be a tough environment over the next several quarters, and has a large share gain opportunity longer-term as independents fall by the wayside." 

Related Link: Walmart Earnings Look Strong Across the Board, But Home Depot Down After Missing on EPS

The Lowe's Analysts

BofA Securities analyst Elizabeth Suzuki maintained at Buy, price target lifted from $137 to $143.

KeyBanc Capital Markets analyst Bradley Thomas maintained at Overweight, price target lifted from $125 to $130.

BofA: 5 Reasons To Own The Stock

Exiting Lowe's first-quarter report, there are five reasons to own the stock, Suzuki said in a note.

These include:

1. There was "a lot to like" in the report, including an EPS beat, comp growth of 11.2% versus the Street's estimate of 4.1% and operating margin expansion of 206 basis points.

2. Lowe's has superior exposure to the do-it-yourself customer, who represents 75% to 80% of total sales versus Home Depot's 40% to 45%. By comparison, the Pro market was negatively impacted by social distancing requirements.

3. The online business saw an 80% year-over-year sales growth and it has plenty of room to continue expanding off its current low base.

4. Incremental COVID-related costs won't disrupt the long-term margin story after Lowe's already eliminated underperforming assets and made other strategic moves.

5. Demand for renovation products should remain a trend for the coming years.

Lowe's Has Sustainable Momentum, KeyBanc Says 

Lowe's first-quarter momentum sustained into May, with a double-digit comp across all regions, Thomas said in a note.

The retailer did choose to withdraw its outlook, although it kept a confident tone in its ability to improve gross margins and continue SG&A leverage, the analyst said. 

The company is considered to be "one of the strongest retailers" within KeyBanc's coverage given a compelling "self-help story" under CEO Marvin Ellison, he said. 

"We believe shares are compelling given the fundamental growth opportunity for the Company, and expect shares to see multiple expansion if execution continues to improve." 

Related Link: PreMarket Prep Stock Of The Day: Lowe's Companies