Both Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) will be reporting their 1Q 2012 earnings in the next two weeks: Home Depot before the bell on Tuesday, 5/15 and Lowe's on Monday, 5/21. It looks like the housing market might be starting to recover in many markets, including my own - I have seen several projects in my neighborhood, that have been on hold for over a year, suddenly beginning to be built again with a vengeance. And these are not small entry-level houses, these are far-above-average-size houses, so clearly someone in this area thinks the economy is getting better.
Jim Cramer thinks so too, and stated as much in his Mad Money episode on Thursday. "We're still in the early innings of a nationwide housing recovery so there's a lot more room to run," Cramer said.
I agree, and feel that both Home Depot and Lowe's offer a nice buying opportunity here - but one is more attractive than the other.
Home Depot is current trading at about $50 per share, slightly off its 52-week high of $52.88 reached on May 3. This is an 80% increase from its low of last summer, and a 20% increase YTD.
Analyst opinion is good, with a mean of 2.0 (1.0 being Strong Buy, 5.0 representing Sell). Of the 30 analysts covering the stock, 11 recommend a Strong Buy, 9 a Buy, and 10 a Hold, with no Underperforms or Sells. The mean target price for Home Depot is $53.35, 6% higher than the current price. The consensus earnings estimate for 1Q12 is $.65, a 30% increase over 4Q11 earnings, and for 2Q12 is a 51% increase over 1Q12. FY2012 consensus is 18% higher than actual FY2011, and FY2013 consensus is 13% higher than FY2012. . The estimate of annual growth for the next 5 years is 14.63%.
With a PE of 20.4, this puts the price of stock at $59.36 for year-end 2012, and at $67.12 for year-end 2013, a terrific 34% potential return by the end of 2013.
Lowe's actually has very similar numbers. Currently trading at about $30 per share, off its 52-week high of $32.29 reached on May 2. This is a 63% increase from its low of last summer, and an 18% increase YTD.
Analyst opinion is also similar. A mean of 2.2, with 7 Strong Buys, 8 Buys, and 14 Holds. The mean target price is $33.27, 12% higher than the current price. The consensus earnings for 1Q12 is $.42, a 45% increase over 4Q11 earnings, and for 2Q12 it is a 76% increase over 1Q12. FY2012 consensus is 13% higher than FY2011, and FY2013 is 22% higher than FY2012. Annual growth for the next 5 years is estimated at 15.9%.
With a PE of 20.7, just slightly higher than Home Depot's PE, this puts the stock price of Lowe's at $38.71 by year-end 2012, and at $47.20 by year-end 2013, a 59% potential return.
Both companies have similar PEs and analyst opinions, both are significantly off their lows of last summer and up approximately 20% year-to-date. Both companies are heavily dependent on the continued recovery of the housing market, which looks like it is happening in many parts of the country. In the last week, both have been upgraded by analysts and had their price targets raised - Home Depot by Barclays (NYSE:BCS) on Tuesday, Lowe's by Morgan Stanley (NYSE:MS) on Monday.
I think both companies should be considered a Buy at this point. But for my money, Lowe's has more potential upside than Home Depot.