Home Depot & Lowe’s Jump as Home Improvement Spending Climbs

After several quarters of subdued sales, recent signs of stabilizing housing market and an improvement in private residential fixed investments have provided upside to the business outlook of home improvement retailers Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW). As a result, S&P’s 500 Home Improvement Retailer Index has risen 36% over the last three months, out-performing Consumer Discretionary Index that grew just 10% during the same period.

See our full analysis for Home Depot | Lowe’s

Revival in Private Residential Fixed Investment

The latest Bureau of Economic Analysis data for July-September shows a 3% y-o-y increase in annual private residential fixed investment and expects Americans to spend about $340 billion on their houses next quarter. This indicates that homeowners who postponed home-improvement expenditures over the past several quarters have now resumed spending on repair and maintenance, providing upside to the U.S.’s two largest retailers Home Depot and Lowe’s, boosting their stock prices over signs of improved forecasts despite weak (yet stabilizing) home prices. The Case-Shiller home price index indicated that home prices were down 3.9% y-o-y last quarter, slightly better than the drop of 5.8% in Q2.

After three years of trailing Consumer Discretionary Index since November 2008, S&P’s 500 Home Improvement Retailer Index has out-performed in the past three months, rising 36% compared to a 10% increase for the former. This is just the second time since 2006 that such an increase has happened, and according to RBC Capital Markets, this hike is better than the boost in 2010 that was stimulated by government tax-credit stimulus programs.

Home Depot’s electrical, plumbing & kitchen and maintenance and repair segments performed well last quarter and the retailer continues to out-perform the market, taking away a larger share in the sector’s renewed activity. This has also boosted its dividend by 16%, bringing the yield up to 3%. While Lowe’s exceeded expectations, it’s still trailing the overall market. Nonetheless, despite current headwinds, it expects to boost sales over the next few quarters, revived after its recent restructuring and re-branding initiatives and newly rolled out online tool “MyLowes”.

The $25 Trefis price estimate for Lowe’s and $40 price estimate for Home Depot are both slightly above their respective current market prices.

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