There’s a lot going on in the vast housing market right now – with mortgage rates rising, house prices soaring, demand for homes skyrocketing and new construction picking up. The only thing missing in the area seems to be housing. While it’s all looking from the outside, this is unsustainable and shouldn’t last long before housing demand subsides in response to high mortgage rates and prices.
Additionally, new builds are also bound to face hurdles related to supply issues, rising wood costs and obtaining building permits. Also, the dilemma of how much inventory to build up in order to avoid excess unsold inventory when demand drops is another thing to think about.
However, there is one area in the housing industry that keeps noises out of the room – home improvement.
A thriving home improvement industry
Currently, the market is short of new homes as demand has grown faster than supply. However, the demand for more spaces to accommodate new lifestyle changes, such as a home office or e-learning setup, must be met regardless. What is the best thing to do after buying a house? The answer is home improvement.
Again, rising mortgage rates and soaring house prices are unlikely to have a significant effect on home improvement demand, a view corroborated by home improvement giant Lowe’s (NYSE: LOW).
Looking at the home improvement industry from another perspective, rising wages and rising employment in the US economy have made it more affordable for consumers to invest in remodeling and remodeling. of their house.
Statista found that in 2021, sales of home improvement products and services in the United States reached $538 billion and are expected to surpass $620 billion by 2025.
The only problem, however, are supply chain constraints, rising interest rates and high lumber prices, which are expected to hurt home improvement sales.
The two largest home improvement retailers – Lowe’s and Home Depot (NYSE: HD) overcome these setbacks and make the most of the current environment which is shaping up to be mostly supportive of home improvement?
Home Depot vs. Lowe’s
Let’s start the discussion by looking at some contributions from Statista. It was found that in 2021, customers spent around $96 on average per visit at Lowe’s, while at Home Depot they spent around $83 on average per visit.
However, this does not necessarily mean that Lowe’s is a better choice among consumers. In another survey, Statista found that in 2021, around 1.8 billion transactions were made at Home Depot, which is a year-over-year increase. Meanwhile, Lowe’s saw just over a billion transactions in the same year, down slightly from 2020.
These statistics show that the two retailers are neck and neck. However, when it comes to investing in company stocks, there are other factors to consider.
In which to invest?
In the most recently reported quarter, both companies reported higher comparable sales year-over-year. Additionally, Lowe’s and Home Depot reported higher sales growth for home improvement professionals than for DIYers. This is important because Pro (professional) customers are more profitable than DIY customers because they are recurring and buy more tools per transaction.
Another boost businesses receive is from DIY customers who have started their home improvement projects but are now looking to take them to the professionals.
When it comes to business customers, however, Home Depot’s Pro sales are higher than Lowe’s. This is an area of improvement that Lowe’s is focusing on.
Importantly, Lowe’s has updated its 2022 sales guidance, while Home Depot also expects modest comparable sales growth.
Wells Fargo analyst Zachary Fadem reiterated a buy rating on the LOW stock with a price target of $260. “We see compelling value for a leading retailer with attractive category dynamics, idiosyncratic growth and structural margin improvement,” Fadem said last month.
Again, Fadem reiterated a buy rating on Home Depot as well, based on calculations that rising interest rates will drive down home improvement valuations. This prompted the analyst to lower his price target to $350 from $400, despite the bullish rating.
However, Lowe’s is currently trading at 1.48x sales, which is below HD’s multiple of 2.15x sales, making Lowe’s valuation slightly more attractive.
When it comes to Wall Street sentiments, both companies have consensus Strong Buy ratings. Home Depot has 16 buys and three holds, while Lowe’s has nine buys and three holds.
The Home Depot’s average price target stands at $373.41, indicating a 21.47% upside from Monday’s early price levels. On the other hand, Lowe’s stock price forecast indicates an average price target of $259.18, indicating an upside of 27.42%.
The home improvement industry has bright prospects for the coming year. In this environment, the two undisputed leaders in this field, Home Depot and Lowe’s, stand to benefit enormously.
Both companies have more pros than cons in their business. Additionally, LOW and HD are currently trading at attractive valuations and have the potential to generate healthy returns if caught before the price rises.
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