Home Depot or Lowe’s? Pros Pick Favorites
Although U.S. retail sales posted strong gains Tuesday on the heels of Home Depot’s better-than-expected quarterly profit, one analyst forecast a tougher spending environment in the second half of the year.
“We definitely have a cautious view as we go into back to school and actually into the holiday season,” said David Strasser, an analyst at Janney Capital Markets. “We just think it’s going to be tougher out there.”
In its earnings report, Home Depot missed analysts’ revenue projections, but topped profit forecasts, which were boosted by tight cost controls.
Strasser has a “neutral” rating on the stock. The company, which trades at roughly 10 times EBITDA (earnings before interest, taxes, depreciation and amortization), has become “pretty expensive,” he added.
Peter Keith, a senior research analyst at Piper Jaffray, does not share Strasser’s concerns about spending in the back half of the year.
“We’re starting to see better and better housing metrics so I see the potential that comps could actually accelerate for Home Depot as the housing market becomes more and more of a tailwind,” Keith said.
Comps, also known as same-store sales, are a key metric for retailers.
For the past several years, housing has been a headwind for Home Depot’s business, but Keith said it is beginning to see some stabilization and positive trends emerge.
“We think that could be a very favorable multi-year driver on one of the few large-cap names in the space to play on housing,” Keith said.
Although they hold diverging views on spending in the back half of the year, Strasser and Keith both favor Home Depot over Lowe’s right now. (Read More: Cramer Weighs In on Home Depot.)
Still, the company could still find itself better positioned than Lowe’s, one of its fiercest competitors, according to some market watchers.
“I think we’re going to find that Home Depot is taking some share from Lowe’s — particularly big ticket,” Strasser said.
In the past year, Home Depot stock has jumped more than 70 percent, while Lowe shares have risen more than 30 percent.
Strasser recently downgraded both of the home improvement retailers’ stocks after the rallies. But, if Strasser were to choose between the two, he said he would pick Home Depot because it is a “fundamentally stronger story at the moment.”
Keith said he also favors Home Depot, which he said has “a management team that’s executing as well as anyone else in retail right now.”
— Written by CNBC.com's Katie Little; Follow Her on Twitter @katie_little.
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Janney Capital Markets acts as a market maker in the securities of Home Depot and Lowe’s. Piper Jaffray makes a market in the securities of Home Depot and Lowe’s.