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Why Home Depot Should Outperform Lowe’s Heading Into 2021

24/7 Wall St. logo 24/7 Wall St. 10/20/2020 Jon C. Ogg

a pair of metal scissors sitting on top of a wooden cutting board © Provided by 24/7 Wall St. Sometimes it can be difficult to decide which industry leader to invest in. The duopoly in retail home repairs and building products seems to leave both industry leaders looking attractive at current prices. According to the team at BofA Securities, Home Depot Inc. (NYSE: HD) and Lowe's Companies Inc. (NYSE: LOW) should both be purchased for upside ahead.

BofA Securities used its own market and economic models called the BofA RENO barometer. This proprietary indicator measures an outlook for consumer spending at home improvement stores. It tracks real-time spending metrics from the bank credit card and debit card spending trends, economic drivers (residential investment), national household financial health (home prices) and opinions on housing (consumer confidence).

Its own research shows that real-time spending has remained very strong and the outlook has improved for a very positive expectation about 2021. Meanwhile, the opinions on the housing score are expected to be a drag.

Both home improvement retailers have enjoyed rather strong 2020 performance despite the recession. Lowe's was leading Home Depot in performance with its shares up 46% year to date. Home Depot's stock had returned about 30% on the same year-to-date measurement. Home Depot trades at a premium valuation, but many investors before and during the recession had shifted into Lowe's after years of Home Depot looking better.

The big question now is which stock has the most upside looking into 2021.

Lowe's was reiterated as Buy with a $202 price target, implying 15.3% upside from the $175.13 reference price. The BofA price objective is based on 23 times the firm's 2021 EPS estimate, and the premium valuation is based on solid fundamentals and the relatively defensive nature of the home improvement industry. While the report noted near-term economic and sentiment risk, the firm sees an opportunity to expand margins for several years due to continued productivity improvements and product differentiation.


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On top of the 13.3% implied upside to the $202 price objective at BofA, Lowe's also has close to a 1.4% dividend yield. Still, the BofA target is handily higher than Refinitiv's $183.42 consensus analyst price target.

Home Depot is valued higher, and the $350 price objective is based on 28 times the 2021 EPS target. This leaves 23.3% in implied upside for Home Depot against BofA's reference price of $283.73. The firm assigned a stronger premium due to the resilience of the home improvement retailers, as well as expected market share gains and Home Depot's consistent execution.

Home Depot comes with a stronger 2.1% dividend yield for total return investors, and BofA's $350 price objective is handily higher than the $302.72 consensus target price.

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With the stimulus bill on the bubble on Tuesday, the home improvement retailers all have a lot to win or lose.

The reaction and the 0.7% gain in the Dow Jones industrials and S&P 500 has favored Lowe's so far on Tuesday. Shares of Lowe's were last seen trading up 1.5% at $177.20, and Home Depot was up 1.15% at $287.05 in early trading.

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