Analyst sets new stock price targets for Home Depot, Lowe’s

Back in the summer, there wasn’t much time for tool time.

People were worried about the economy and inflation and didn’t think much about home repairs.

Related: Analysts Reset Price Target on Home Depot Shares Ahead of Fed Rate Cut

The nation’s two largest home improvement retailers—Home Depot (HD) and Lowe’s (LOW) — were reporting fiscal second-quarter earnings, and their CEOs were feeling very worried about the economy.

Marvin Ellison of Lowe’s told analysts that “a lot of uncertainty remains, particularly around interest rates and inflation.”

“On housing in particular, we see significant implications as a result of the lock-in effect,” Ellison said.

“Simply put, people aren’t moving as often as they usually do because current mortgage rates are so much higher than their existing rates,” he added. “And as a result, housing turnover is nearing its lowest levels since the mid-1990s.”

Ellison said that while the company delivered “positive (comparisons) in Pro and online sales, we continue to do well in DIY demand.”

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Home Depot CEO warns of ‘macroeconomic uncertainty’

And Home Depot’s Ted Decker said that “during the quarter, higher interest rates and greater macroeconomic uncertainty put more pressure on consumer demand, leading to weaker spending on home improvement projects “.

“Additionally, we saw continued softness in spring projects, which were also impacted by extreme weather changes throughout the quarter,” Decker said during the company’s earnings call.

Related: Analysts reset price target on Home Depot shares following earnings

“When we look at the performance in the first six months of the year, as well as the continued uncertainty about underlying consumer demand, we believe a more cautious sales outlook for the year is warranted,” Decker said.

Billy Bastek, Home Depot’s executive vice president of merchandising, told analysts that “teachers outperformed the DIY customer, but both were negative for the quarter.”

But there were some glimmers of hope.

In July, a study by the Remodeling Futures Program at Harvard University’s Joint Center for Housing Studies said that after a modest recession, spending on home improvements and repairs was expected to increase in the first half of 2025.

The Leading Indicator of Remodeling Activity report, released in July, projected that the decline in annual spending on renovation and maintenance of owner-occupied housing would slow to just -0.5% by the second quarter of 2025.

“Economic uncertainty and continued weakness in home sales and sales of building materials are keeping a lid on residential remodeling, although many spending drivers are beginning to strengthen again,” said Carlos Martín, director of the center’s Remodeling Futures Program. in a statement.

“After several years of frenetic activity during the pandemic, homeowners are now making upgrades and repairs to their homes at a steadier and more sustainable pace,” Martin said.

Abbe Will, associate director of the Remodeling Futures Program, said annual spending on home improvement and maintenance by homeowners should reach $466 billion in the second quarter of next year, on par with spending in the past four quarters.

Analyst says housing activity should pick up

“The slowdown in home remodeling should continue to be relatively mild, with activity stabilizing only near last year’s peaks,” Will said.

And then on September 18, the Federal Reserve cut the federal funds rate by 0.5 percentage points to a range of 4.75% to 5%.

More economic analysis:

• Jobs reports surprise for higher Fed rate cuts
• Jobs reports on the timing and size of the Fed’s fall interest rate cuts
• The Fed’s rate cut may not guarantee a September stock market rally

Shares of Home Depot are up nearly 15% year-to-date and up 30.2% year-to-date. Shares of Lowe’s are up nearly 19% year to date and up 26% year-to-date.

Both companies saw their shares rise after the interest rate cuts were announced.

“With rate cuts finally here and a Fed easing cycle underway, the home name should soon see the start of a fundamental recovery (fiscal 2024),” analysts at Mizuho Americas said on September 20.

“In our view, and in line with recent management comments, housing activity should gradually pick up, unlocking significant pent-up demand despite still high overall housing prices,” the firm said.

Mizuho reiterated its Top Pick designation on Lowe’s, as well as positive views on Home Depot and e-commerce furniture and home goods retailer Wayfair (w) .

On September 24, analysts at Oppenheimer adjusted their price targets for Home Depot and Lowe’s.

The investment firm raised its price target on Home Depot to $400 from $345 and affirmed an outperform (effectively neutral) rating on the stock.

Oppenheimer also upgraded Lowe’s to Outperform, also with a $400 price target, up from $345, suggesting upside potential of more than 15% from current levels.

Oppenheimer said its more bullish stance on Lowe’s reflected a still-undervalued stock valuation and “continued operational weakness” within the company’s business model.

Oppenheimer said he was taking a “somewhat more constructive stance” on the actions of major home improvement retailers.

The outlook for demand trends in home improvement retail and top operators will “gradually solidify and return to normalized expansion algorithms.” That’s because lower loan rates are spurring improved housing activity, likely supporting higher home prices and encouraging buyers to make bigger-ticket purchases, the firm said.

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