Top Stock Picks: Home Depot vs. Lowe's – Which is the Better Buy?

As two of the largest home improvement retailers in the United States, Home Depot HD and Lowe's LOW have been crucial players in the housing market. However, after a tough few years marked by rising inflation, interest rates, and a cooling housing market, both companies are showing signs of recovery. Despite facing similar economic pressures, they each have their strengths, weaknesses, and growth prospects. Financial brokers from Fibonachis have produced an in-depth analysis, providing critical insights into ongoing market conditions. The current state of both companies, their performance, and the potential for future growth help investors determine which stock might be the better buy.

Home Depot vs. Lowe's: Store Expansion and Market Reach

Home Depot and Lowe's differ significantly in terms of their global reach and store expansion strategies. At the end of its fiscal third quarter, Home Depot operated 2,345 stores across the U.S., its territories, Canada, and Mexico. Lowe's, on the other hand, had 1,747 stores, all located in the United States. While Home Depot has maintained a modest expansion in its store count– increasing by 1% since the end of fiscal 2021, Lowe's has reduced its footprint by 11%, largely due to the sale of its Canadian business and its exit from Mexico.

Looking ahead, Home Depot plans to open 12 new stores this fiscal 2024, signaling its continued commitment to growing its physical presence. Meanwhile, Lowe's has no plans to expand its brick-and-mortar footprint, which suggests a more conservative approach. This difference in expansion strategies could be significant for investors considering which company is poised for future growth. While Home Depot's broader geographical footprint and expansion plans provide more growth potential, Lowe's is focusing on strengthening its existing U.S. operations.

Revenue and Profit Growth

Both Home Depot and Lowe's began fiscal 2021 with strong performance as the housing market rebounded from the initial COVID-19 pandemic slowdown. However, the subsequent economic challenges, including inflation and rising interest rates, slowed their growth. Home Depot fared better during these years, experiencing a smaller decline in comparable store sales compared to Lowe's.

For fiscal 2024, Home Depot projects a 2.5% drop in comparable store sales, while Lowe's expects a more significant decline of 3% to 3.5%. Despite facing similar pressures, Home Depot's larger scale and broader store base may help it navigate these challenges more effectively. Analysts forecast a compound annual growth rate (CAGR) of 4% for Home Depot's revenue from fiscal 2023 to 2026, compared to Lowe's expected CAGR of less than 1%.

In terms of profitability, Home Depot has consistently outperformed Lowe's. From fiscal 2021 to 2023, Home Depot's gross margin slightly decreased from 33.6% to 33.4%, while Lowe's saw a small improvement, rising from 33.3% to 33.4%. However, on the bottom line, Home Depot's earnings per share (EPS) largely mirrored its revenue growth, while Lowe's faced a sharp EPS decline in fiscal 2022 due to its Canadian business divestment.

Looking ahead, Home Depot anticipates a 2% decline in EPS for fiscal 2024, whereas Lowe's expects a steeper drop of 9% to 10%. From 2023 to 2026, analysts predict Home Depot's EPS will grow at a 4% CAGR, while Lowe's EPS is expected to increase by just 1%. Home Depot's superior growth and profitability make it a more attractive investment.

Stock Valuation and Future Prospects

Valuation plays a key role for investors considering Home Depot or Lowe's. Currently, Home Depot's stock trades at 28 times next year's earnings, while Lowe's trades at a slightly lower multiple of 22. Though Lowe's may seem more affordable, Home Depot's higher valuation is supported by its stronger growth prospects, larger market share, and international exposure. Additionally, Home Depot offers a more attractive dividend yield of 2.2%, compared to Lowe's 1.7%.

Investors should assess if current market conditions, including a potential interest rate decline, justify buying either stock. As the macroeconomic environment stabilizes, Home Depot's broader footprint, growth potential, and solid financial performance make it the better choice for those seeking long-term gains in the housing sector.

Conclusion

While both Home Depot and Lowe's are strong companies with solid track records, Home Depot stands out as the better investment at this time. Its larger size, more diversified geographical presence, and better growth prospects make it more attractive than Lowe's. Although Lowe's has made strides in improving profitability, it faces challenges in expanding its business, and its growth rate is expected to be slower in the coming years.

For investors seeking exposure to the home improvement sector, Home Depot offers a more compelling opportunity, particularly as the housing market recovers. However, investors should remain cautious and wait for a more favorable macroeconomic environment, as the full impact of interest rate changes and inflation still lingers.