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Home Depot & Lowe’s Touch 52-Week High: More Room to Run?

Zacks

The Building Products – Retail industry has portrayed a bull run in a year’s time as evident from its surge of 37.9%, outperforming the S&P 500 index’s growth of 23.9%. Impressively, the industry ranks in the top 14% (36 out of 256) of the Zacks classified industries. In fact, the industry has been gaining from a buoyant U.S. economy.

Some of the companies that have been gaining from this industry’s uptrend are The Home Depot, Inc. HD, Lowe's Companies, Inc. LOW, Beacon Roofing Supply, Inc. BECN and Lumber Liquidators Holdings, Inc. LL. Apparently, Home Depot and Lowe's have scaled a 52-week high on Jan 5. Furthermore, Lumber Liquidators, Home Depot and Beacon Roofing have outpaced the industry with the rally of 107.8%, 43.3% and 45.6%, respectively, in a year. Although Lowe's has underperformed the industry with its gain of 33.3% but definitely has potential to grow more.



Out of these stocks, Beacon Roofing sports a Zacks Rank #1 (Strong Buy), Lumber Liquidators has a Zacks Rank #2 (Buy) while both Home Depot and Lowe's carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Furthermore, some analysts believe that the broader Retail/Wholesale sector, of which the Building Products – Retail industry forms part of, is likely to gain from the recent Republican tax cuts. The sector is currently placed at the top 19% (3 out of 16) of the Zacks classified sectors.

Here, we are to focus on the fundamentals and solid strategies of the two leading players of this industry — Home Depot and Lowe's.

Home Depot

Shares of Home Depot scaled a 52-week high of $192.54 on Friday, closing slightly lower at $192.50. The company looks good on the back of its robust earnings trend, disciplined capital allocation strategy, focus on pro-customers and steady housing market recovery. Interestingly, this world’s largest home improvement retailer has retained its five-year long trend of positive earnings surprises.

In fact, Home Depot has been benefiting from strength in its core business, relentless focus on affording innovative products, boosting interconnected customer experience and driving productivity. Additionally, management has been implementing several initiatives to drive growth. Evidently, it remains focused on developing merchandising tools and increasing investment in e-commerce to boost top-line growth and enhance market share.

Although Home Depot has been posting solid financial results for a long time, the company’s gross margin looks troubled. In the last reported quarter, gross margin fell 10 basis points and is likely to continue in the fourth quarter of fiscal 2017. We expect the decline to be temporary and recovering from the company’s solid growth strategies. Furthermore, a Growth Scoreof B and a long-term earnings growth rate of 13.4%, highlight the stock’s growth potential.

Lowe's

Shares of Lowe's too hit a 52-week high of $94.80 on Jan 5, though it closed a tad lower at $94.74. We believe improving job scenario, housing market recovery, merchandising initiatives and post hurricane construction activities along with efforts to enhance omni-channel capabilities bode well for the company.

Additionally, Lowe's seems to be benefiting from its strategic acquisitions. This is evident from the Orchard Supply Hardware Stores buyout, which is aiding comparable-store sales growth. Also, the acquisition of Maintenance Supply Headquarters is strengthening relationship with pro customers. Meanwhile, the company's Canadian business has been performing quite well. The RONA buyout is likely to further augment its position in the Canadian market.

However, Lowe's has been struggling with soft gross margins for the last few quarters. Apparently, in the first, second and third quarter of fiscal 2017 gross margin declined 64, 23 and 28 basis points to 34.4%, 34.2% and 34.1%, respectively.

Nevertheless, Lowe's VGM Score of A with a long-term earnings growth rate of 14.7% buoys optimism in the stock.

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