How To Build A Plan For Trading Home Depot And Lowe's Ahead Of Earnings

Home improvement retailers Home Depot Inc HD and Lowe's Companies, Inc. LOW will be reporting their quarterly earnings on February 21 and March 1, respectively, even as the industry is lapping some tough comparisons and digesting soft macro data.

On the sector front, Jefferies said its checks showed strong sales in the fourth quarter, suggesting home improvement spending still remains healthier than most areas in retail.

“A favorable consumer backdrop and rising home prices continue to support strong sales, but we are keeping a watchful eye on key macro data as we have seen modest softening in the y-y growth rates for jobs and wages,” analyst Daniel Binder wrote in a note.

Among the two retailers, Binder prefers Home Depot, which is expected to show relative outperformance.

“At this point all the evidence (i.e. vendor reports, government data, and our surveys) would suggest a strong Q4 for HI retailers, but we continue to prefer HD to play the reversion to the mean trade in HI spending,” Binder continued.

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

The analyst raised his U.S. comp store sales outlook for Home Depot to 5 percent from 3.5 percent and his overall comp view to 4.5 percent from 2.7 percent. Binder also boosts his US comp outlook for Lowe’s to 3.5 percent from 2.5 percent and total company comp to 3.6 percent from 2.6 percent.

In addition, Binder upped his EPS estimate for Home Depot to $1.35 from $1.32 and Lowe’s to $0.80 from $0.78.

Though Jefferies’ checks show that both retailers had a solid fourth quarter, Binder is more leaned towards Home Depot.

“We continue to believe that HD will distinguish itself in the market over the coming years with share gains in Pro and MRO. As a result, we believe it could still be a rare outperformer in retail even if the Fed raises rates further,” Binder highlighted.

The analyst also noted that those retailers who were able to comp mid-single digits, grow EPS mid-teens and generally see upward EPS revisions tend to outperform in a rising rate environment.

“Since we are seeing a reversion to the mean in home improvement spending and still sit below long-term averages, we think HD could meet that criteria,” Binder added.

Binder has a Buy rating on Home Depot shares with a target price of $162, while he has a Hold rating on Lowe’s with a price target of $78.