According to analyst Brian Nagel from Oppenheimer, the outlook for home improvement companies is looking up. However, Nagel believes that both Lowe's and Home Depot still have challenges ahead.
Nagel downgraded the shares of these companies from Outperform to Perform on Monday and also adjusted his price targets for their shares. Home Depot's new stock call is $345, down from $360, while Lowe's forecast went to $230, down from $275.
As of now, Lowe's shares are down 0.1% at $219.72, and Home Depot has fallen 0.5% to $360.59.
Nagel's concern stems from the fact that the market has become overly optimistic about the home improvement sector. He asserts that companies in this industry face ongoing challenges that could impact their performance.
While Nagel remains positive about the sector's long-term prospects and leading operators, he worries that the market's short-term positioning towards Home Depot and Lowe's may be overly complacent. He suggests that the share prices may not adequately account for potential fundamental weakness that could persist.
Lowe's is currently trading at 17.2 times the expected per-share earnings for the coming year, while Home Depot is valued at 23.3 times. According to Nagel, this places them towards the higher end of their historical valuation ranges. This reflects the market's hope for a near-term recovery.
The Bull Case for the Home Improvement Sector
Investors have high hopes for the housing market as the Federal Reserve is expected to cut interest rates, leading to a decline in mortgage rates. This decrease in rates will likely attract more buyers to the housing market, ultimately creating a demand for home renovation projects. Despite this positive outlook, analysts believe that current trends in the housing market and the home improvement sector are still below historical peaks.
Sales projections for companies like HD and LOW, as well as the broader home improvement space, may be affected by the persistently weak housing turnover. This ongoing concern might slightly hinder sales growth in the near term. Furthermore, the sector faces additional challenges such as diminished demand for discretionary goods and the continued high costs of borrowing. These factors contribute negatively to the demand for big-ticket items in the home improvement market.
Nevertheless, despite these challenges, one industry expert, Nagel, maintains a bullish outlook for the home-improvement sector in the long run. He predicts that by the end of 2024 and into 2025, the situation will begin to improve.
