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Roth MKM rates Tractor Supply stock at Buy.
Bernard Park
Home improvement retailers have had a tough 2023, and their coming first-quarter earnings reports might not do much to help the stocks. The picture, however, could brighten as the year goes on, making some stocks worth considering.
HomeDepot
(ticker: HD) and Lowe’s (LOW) are slated to report first-quarter results one week apart, on May 16 and 23, respectively. Consensus calls for both companies’ per-share earnings to dip year over year. Analysts expect Home Depot to deliver earnings of $3.86 a share, down from $4.09 in the first quarter of 2022, and Lowe’s earnings to come in at $3.49 a share, just below last year’s $3.51.
The companies’ shares reflect what many feel is a modest near-term outlook for home improvement. Home Depot stock has fallen more than 9% in 2023, while Lowe’s has edged up just over 1%—compared with the
S&P 500
‘s 7% rallied year to date.
Given the affordability crisis, the jump in mortgage rates, and low home supply, the housing market’s traditionally strong spring season has been a lackluster one. Home improvement retailers can still benefit even when people aren’t buying and selling, though—for example, homeowners might find it more economical to remodel their current home rather than trade up. But many investors worry that most big projects have been done during the pandemic years, while inflation and fears of a recession could prevent some customers from committing to expensive renovations.
On Friday, Roth MKM analyst David Bellinger cut his first-quarter same-store sales estimates for Home Depot and Lowe’s ahead of their reports, writing that they need to “get a weak first quarter out of the way.”
Unfavorable spring weather certainly didn’t help. But the analyst also warns that lumber prices—which he estimates have fallen some 64% since the first quarter of 2022—will translate to the biggest comp headwind for both chains’ sales.
Indeed, earlier this week
Floor & Decor
(FND)—a big beneficiary of remodeling demand—reported an in-line first quarter, but warned that achieving the top end of its full-year guidance may be a stretch. The company notched a 3.3% decline in comparable sales in its first quarter, a figure that has accelerated to more than 6% so far in the second quarter.
That said, Bellinger notes that things could improve as summer takes hold.
Tractor Supply
Co
(TSCO) management recently commented that 2023 is so far shaping up much the way 2013 and 2014 did in terms of weather. While today’s housing market looks different than it did a decade ago, Bellinger says that Home Depot and Lowe’s saw a pickup in same-store sales in their second and third quarters in 2013.
Ultimately the analyst has a Neutral rating on both stocks. Despite some sequential improvements in housing data, there “remains a long way to go before giving an all-clear on home improvement,” he wrote. That said, if a soft first quarter does mark a low point, many investors could take the opportunity to jump in.
“Recent conversations suggest an ample amount of longer-term oriented interest in owning both Home Depot and Lowe’s,” Bellinger wrote.
For impatient investors however, Bellinger says Tractor Supply stock is a buy now, after its post-earnings selloff. He says its downbeat results were largely weather-related, and therefore temporary. The first quarter is typically a light one for the company, and the analyst sees “plenty of time left in the year and a potentially elongated summer selling season as positives near-term.”
Bellinger has a $255 price target on Tractor Supply shares, just about in-line with Wall Street’s average target. Plenty of other analysts also say to pick up Tractor Supply on the dip: More than two-thirds of analysts tracked by FactSet are bullish on the stock, compared with 57% and 51% for Home Depot and Lowe’s, respectively.
Write to Teresa Rivas at [email protected]
