Investors turned another page in the home improvement story Tuesday.
A day after
better-than-expected quarterly results, its larger rival
did the same. The results, along with a strong earnings forecast from home furnishing chain
, offered yet more evidence that consumers continue to spend on home-related goods in the face of the recession. This so-called cocooning thesis has gained currency in the wake of Sept. 11, pushing up shares in the sector dramatically.
But now, at least in the case of Lowe's, some people are wondering just how happy the ending will be. One of the stock's early boosters, analyst Wayne Hood of Prudential Securities, cut his ratings on Lowe's Tuesday, saying growth would inevitably slow from its recent torrid pace despite the company's strong fundamentals. His comments sparked a mild selloff in Lowe's and Home Depot, which fell 2% and 1%, respectively. Meanwhile, Pier 1 jumped 10.4% to $19.40 in recent trading.
Wall Street spent much of the past year warming up to Lowe's. Some analysts said the company hadn't commanded the respect of the financial community because its management appeared less polished than Home Depot's. But that changed as Lowe's reported impressive earnings and sales growth. Some analysts even came to prefer Lowe's stock to Home Depot, saying the companies shared many positive attributes but that Lowe's was cheaper and had an easier growth course ahead. It was a bet that paid off last year: Lowe's stock rose 108%, while Home Depot edged up 12%.
But this year, both stocks are about flat on the year, despite the companies' strong numbers in many categories. Monday, Lowe's reported a 55% gain in fourth-quarter earnings and a boost in first-quarter financial guidance; Tuesday, Home Depot said earnings jumped 53% on a 29% sales boost.
"Our Buy recommendation for Lowe's over the last couple of years reflected our belief that the company was in the midst of significant improvement in its fundamentals that could lead to greater-than-expected earnings and a narrowing in the multiple gap with Home Depot," Hood wrote in a report downgrading Lowe's to hold from buy. "While we believe those strong fundamentals remain intact, the rate of change appears to be moderating."
He cites a host of reasons for the downgrade, from valuation to decelerating quarterly earnings growth. As of Tuesday, Hood had a buy on Home Depot. His updated report following the earnings call hadn't been released at noon Tuesday. (His firm doesn't do investment banking.)
As for Home Depot, it said it expects to meet the current Wall Street estimate for the first quarter of 32 cents a share, an 18% gain from a year ago. And while Home Depot executives referenced the jittery economy in a conference call with investors, they were more sanguine on the economic outlook than
other retailers, such as giant
, have been recently.