Home Depot & Lowe's: As Goes Housing...

Includes: HD, LOW
by: Investopedia Advisor

Investopedia Advisor submits: Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) continue to report pretty solid earnings. But my gut tells me that is going to change, and that their respective stocks will respond in kind. Here is what worries me:

Interest rates: Interest rates have risen dramatically over the past two years, and we are starting to see the housing market stumble as a result. And when people aren’t spending money on new homes, the major home improvement retailers feel it.

Fuel Prices: First, how do you think all of that stuff gets into their warehouses? By truck! And these shipping expenses are either going to be eaten by the company or passed along to consumers. Neither is a good option.

Next, look around inside of any Lowe’s and Home Depot. Almost every product contains some amount of plastic. Guess what? Plastics contain oil based components. So the price of all those neat gadgets is going to be going up. And that, I suspect will take a bite out of future sales.

Wages/Spending: Your money buys less then it did a few years ago. As a result, the total dollars spent by the typical “do- it your-selfer” isn’t likely to keep growing. In fact, they are likely to come down as these folks are able to afford fewer items for their dollar.

Minimum Wage Increase: What would happen if the United States were to raise the national minimum wage? Home Depot and Lowe’s would be hit really hard given their already lofty labor costs! While a wage hike may be a good thing for workers at both companies, I think it would be bad for the growth of the business, and ultimately the shareholders.

Increased Taxes/Decreased Construction: A number of states and municipalities throughout the United States, and North America are seeing their budgets tighten. They don’t have huge dollars to spend on construction projects and buildings like they did a few years back.

As a result, they will either be forced to raise taxes, and/or cut construction projects, or both. This in turn will affect consumer’s ability to spend, as well as the total dollars being put toward projects that theoretically the Home Depot’s and the Lowe’s of the world could have provided tools for.

Evidence Provided: This past Tuesday, Home Depot reported that its second quarter net income increased by 5.3%, which beat Wall Street expectations by about a penny. Investors appeared thrilled as they bid the stock up about a dollar from the previous days close.

The problem, however, is that its same store sales declined by 0.2% during the quarter. And, its chief exec, Bob Nardelli commented that the second half of the year would be “challenging”. Back in January he predicted bottom line growth of between 10% and 14% for the year. Now, he now expects earnings to be in the “lower end” of that range.

Lowe's is trying to compete, and grow its store base. But it’s facing a tough environment. Analysts have lowered their estimates over the last 60 days from $2.08 a share for the year ending January 2007 to $2.05 a share. They also took down 2008 numbers from $2.38 to $2.32.

I think that estimates for both Home Depot and Lowe’s will get cut from even these levels. I also think that the shares of both companies will start to fade as investors become aware of the fact that these folks are going to have a tough time growing over the next 12 to 24 months.

HD 1-year chart:

LOW 1-year chart:

By Ben McClure, Contributor - Investopedia Advisor

At the time of release Ben McClure did not own any shares in any of the companies mentioned in this article.