Analysts Build Their Expectations For Home Depot, Lowe's Earnings

Earnings season is coming to an end, but there are still a few notable companies on deck, including the two major home improvement retailers: Home Depot Inc HD and Lowe's Companies, Inc. LOW.

Positive Expectations

Home Depot should deliver an earnings report slightly ahead of consensus estimates, while Lowe's should deliver an in-line quarter, Longbow Research's David MacGregor commented in a report. This view is based on the analyst's store checks and read-through from vendors, which suggests both chains are benefiting from a strong macro environment.

Home Depot and Lowe's also benefited from ongoing strength in big ticket items but a "promotionally intensive" environment should limit margin expansions, the analyst said. In fact, there are some gross margin headwind concerns from a stronger mix of appliances, building materials and commodity products.

Nevertheless, more people continue to invest in their homes rather than spending money on discretionary items, which bodes well for companies like Home Depot and Lowe's.

"All indications are that 2017 will be a good year for home improvement spending and we see the low-beta, cash-generating home centers as a reliable way for investors to participate," the analyst emphasized.

Home Depot is expected to earn $2.21 per share in the second quarter, a 15.8 percent operating margin, and a 5 percent comp stores growth.

Lowe's is expected to earn $1.62 per share in the quarter, a 12.1 percent operating margin, and a 4.4 percent comp stores growth.

Credit Suisse: Stay The Course

Home Depot and Lowe's are two of the "better positioned" retailers among the entire retail group given an above average demand growth profile and a "generally tame" competitive environment, Credit Suisse's Seth Sigman said in a report.

Similar to MacGregor, Sigman believes industry-wide data suggests both Home Depot and Lowe's will report an in-line to slightly better results. Home Depot is expected to show U.S. comps growth of 5.5 percent with some indicators suggesting more than a 6 percent growth.

On the other hand, Lowe's should show comp growth of 3.5 percent given a busier promotional quarter and less optimistic e-commerce data points. Lowe's acquisition of Canada-based Rona has recently "caused some noise."

As such, Home Depot's prospects appear to be more favorable than Lowe's but Lowe's stock is trading at a more than 4x discount to Home Depot, the analyst added. This may support owning Lowe's stock, especially since Home Depot's stock has suffered from a "sell on the news reaction" after its earnings report.

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