The weak housing market has weighed on home-improvement stocks over the past year. That could extend well into 2024, according to Telsey Advisory Group.
Analyst Joseph Feldman downgraded shares of Home Depot (ticker: HD) and Lowe's (LOW) to Market Perform from Outperform on Tuesday, a week ahead of retail earnings season.
Feldman's new pessimism over the stocks stems from concern over the housing market's slow recovery. Existing home sales have declined for several quarters, given rising interest rates, limited housing inventory, and lower affordability . Home prices—which Feldman argues are a "key driver" of home improvement sales —also have been declining.
A strong housing market is often better for home-improvement companies as people undertake more renovation projects when they move. And while there have been some fledgling signs of improvement, or at signs least that the housing market may be hitting a bottom, it will be a while before the market fully rebounds.
"The data seems to show a bottoming for the housing market, with the trend line indicating some stability and less negative trends," he wrote. "However, it's important to note the bottoming phase could take some time."
The analyst lowered his 2023 and 2024 fiscal-year earnings per share estimates for both companies. He left his target price for both stocks unchanged—Home Depot at $315 and Lowe's at $225.
To be sure, home-improvement companies can often weather a housing market slowdown relatively well. A weak market can convince homeowners to remodel their current house rather than buy a new one. But because interest rates are rising, people are more reluctant to embark on large-scale projects with big price tags, especially since many homeowners upgraded their houses during the pandemic years.
"The moderation in home price appreciation, rising costs of project financing, construction materials, and labor, as well as the uncertain economic environment may impact remodeling growth," Feldman wrote.
Shares of Lowe's fell 2.3% on Tuesday to $218.09, while Home Depot was down 1.3% to $324.75. Lowe's has outperformed its biggest competitor this year, with the shares up 9.4% compared to Home Depot's 2.8% gain. But both lagged the broader market, with the S&P 500 up 16% in 2023. Lowe's is a Barron's stock pick.