After releasing its third-quarter earnings report, numerous Wall Street analysts have bolstered their price projections for Lowe’s Companies (LOW 0.09%). Truist’s Scot Ciccarelli has elevated his target to an impressive $310 while sustaining a buy rating on the stock, reflecting a positive outlook for the company amidst changing market conditions.
Why Lowe’s Companies is Positioned for Success in a Low-Interest Rate Climate
Wall Street has shown increased enthusiasm for the home improvement sector this year, anticipating gains from a declining interest rate landscape. Analysts like Ciccarelli regard Lowe’s as a prime beneficiary of this trend, which is expected to enhance consumer spending on home-related projects driven by lower mortgage rates and a resurgence in home sales. Typically, when homeowners prepare to sell or have recently purchased a property, they invest in improvements, leading to a boost in Lowe’s sales and services.
US Existing Home Sales data by YCharts.
While there is a compelling case for optimism, caution is warranted. Despite the Federal Reserve’s recent interest rate cuts, both market and mortgage rates have experienced an upward trend, which may temper the expected benefits for home improvement retailers.
30-Year Mortgage Rate data by YCharts.
Historically, economic cycles have shown that market rates will eventually decrease, but this process may take longer than what current valuations of home improvement stores suggest. Investors should remain vigilant and consider potential delays in the anticipated recovery of the housing market.
LOW EV to EBITDA (Forward) data by YCharts. EV = enterprise value. EBITDA = earnings before interest, taxes, depreciation, and amortization.
Furthermore, while Lowe’s and its competitor, Home Depot, seem like straightforward investments in this theme, their current valuations indicate limited upside potential to offset the inherent risks. Observing the trends in Home Depot’s customer transactions, average ticket prices, and comparable sales growth reveals a concerning picture, as these metrics are currently in negative territory. Likewise, Lowe’s has projected a decline in comparable sales ranging from 3% to 3.5% for 2024, indicating ongoing challenges in the market.
Data source: Home Depot presentations. Chart by author.
While investing in Lowe’s and Home Depot appears to be popular strategies, their valuations suggest minimal upside, prompting investors to explore better-value alternatives. Options such as Pentair, which specializes in pool products, Whirlpool, known for home appliances, or Owens Corning, a leader in roofing, insulation, and doors, may provide more attractive investment opportunities amidst the evolving market landscape.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot. The Motley Fool recommends Lowe’s Companies, Owens Corning, and Whirlpool. The Motley Fool has a disclosure policy.
