Housing sales may have been down lately, but home-improvement companies are rocking.
"Housing turnover of new and existing homes is at about 5% or 6%," Joe Feldman, an analyst at Tesley told TheStreet on Monday, Aug. 13. "The rest are staying put and they're continuing to invest in their homes and shopping at home-improvement stores."
Shares of Home Depot, the leader in the sector, closed slightly down on Monday to $194.14. A year ago, the stock was trading at $154.26. Lowe's shares closed down more than 1% to $97.09; a year ago, they were at $77.72.
Although the state of housing impacts home-improvement companies, current factors are boosting sales. The National Association of Realtors reported recently that U.S. housing sales were down in June, the third month in a row, and CEO of Redfin Inc. (RDFN) , a high-tech real estate brokerage company, Glenn Kelman, said on Thursday that some markets are soft. Yet, when home owners stay in their houses rather than move to a new one, they tend to make improvements, which drives sales for the likes of Home Depot and Lowe's.
In a note, published Monday, Feldman wrote: "We expect the average comp [for Home Depot] to accelerate to 6.5%, up from 2.4% in the first quarter of 2018. Our 2Q18 estimates reflect a 7.5% comp for Home Depot and a 5.5% comp (up from 5%) for Lowe's. We expect Home Depot to raise its 2018 outlook on a strong first half of 2018. For Lowe's, we look forward to new CEO Marvin Ellison sharing his initial high-level strategy, which should be a positive catalyst."
Credit Suisse's Seth Sigman expects "strong results for home improvement retailers, despite a mixed housing backdrop in the second quarter," and a bright future based on a steady demand for products, stronger repair and remodel trends, elevated home values and an aging housing stock that will need new roofs and kitchen and bathroom renovations, for example.
According to FactSet, analysts covering Home Depot are expecting earnings per share of $2.85, up from $2.25 a year ago, on sales of $30 billion with same-store sales rising 6.7%.
In a recent note from Wells Fargo's Zachary Fadem, the bank raised its price target to $220, based on anticipated strong comps and other factors.
About Lowe's, he wrote, "We believe investors anxiously await new CEO Marvin Ellison's first quarterly call, with a key focus on annual guidance, opportunities for improvement and changes in strategy."
Wedbush's Seth Basham wrote in a recent note that investors will likely give Ellison leeway when the company reports next week, but added that a second-quarter miss and downward guidance is "unlikely to be well-received."
As for Home Depot, the bank is estimating a 7% increase in comps, "about in line with buy-side expectations and near consensus +6.6% due to strong execution and pent-up demand."