A substantial rise in new-home purchases, and the growing popularity of DIY and smart home technologies, have contributed significantly to the growth of the home improvement industry. So, we think fundamentally strong stocks in this space, Lowe’s Companies (LOW) and Mohawk Industries (MHK), are worth betting on now. Conversely, Home Depot (HD) and Sherwin-Williams (SHW) don’t look well-positioned to capitalize on the industry tailwinds. Their bleak financials make the stocks of these two companies best avoided now. Read on.
Home improvement trends have changed markedly over the past year because the COVID-19 pandemic sparked an unprecedented tidal wave of housing projects, with homeowners spending more time at home than they did prior to the public health crisis. In addition, the high demand for residential properties amid a low-interest-rate environment and the increasing popularity of smart home technology features have been among the factors driving the growth of the home improvement industry.
The global home improvement services industry is expected to reach $585.3 billion by 2030, exhibiting a 6.2% CAGR from 2021. And the home improvement market is also changing its sales approach in response to the shift to digital platforms. As such, we believe fundamentally sound home improvement stocks Lowe’s Companies, Inc. (LOW) and Mohawk Industries, Inc. (MHK) are well-positioned to cash in on the industry’s robust growth potential.
Conversely, with consumer discretionary spending shifting toward entertainment and travel as pandemic restrictions ease amid a rapid vaccine rollout, we think fundamentally weak companies in this space, The Home Depot, Inc. (HD) and The Sherwin-Williams Company (SHW), might struggle to grow.
Stocks to Buy:
Lowe’s Companies, Inc. (LOW)
Mooresville, N.C.-based LOW is one of the largest hardware chains in the U.S. and operates 2,197 home improvements and hardware stores in North America. The company offers a line of products for remodeling, decorating, construction, and home improvement. LOW also provides installation services, in-warranty and out-of-warranty repair services, and extended protection plans.
In August, LOW launched an exclusive program for its customers–#FallTogether Collective–in which a group of 10 creators will help LOW’s customers improve their home spaces, both indoor and outdoor. Through this customized project plan, the company expects to inspire its customers by offering them advice on improving their living spaces.
In July, LOW announced that entrepreneurs who faced instability due to the pandemic lockdown could pitch their products on Lowes.com and Lowe’s nationwide stores. The company believes that its “Making It…With Lowe’s” program will help strengthen the company’s relationship with its customers and help many small businesses.
LOW’s net sales for the second quarter, ended July 30, 2021, increased 1% year-over-year to $27.57 billion. The company’s operating income increased 6.4% from its year-ago value to $4.21 billion. Also, its net earnings rose 6.7% from the prior-year quarter to $3.02 billion, while its EPS grew 13.6% year-over-year to $4.25.
Analysts expect LOW’s revenue for its fiscal year 2022 to be $92.87 billion, representing a 3.7% year-over-year growth. The company has an impressive earnings surprise history; it beat the consensus EPS estimates in three of the trailing four quarters. LOW’s EPS is expected to increase 27.9% in the current year and 7.8% next year. Furthermore, the stock has gained 25.6% in price over the past six months and 32.6% over the past nine months.
LOW’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Also, the stock has a B grade for Momentum and Quality. We’ve also graded LOW for Growth, Value, Stability, and Sentiment. Click here to access all of LOW’s ratings. LOW is ranked #10 of 64 stocks in the B-rated Home Improvement & Goods industry.
Mohawk Industries, Inc. (MHK)
Global flooring leader MHK designs, manufactures, and distributes ceramic and flooring products. Global ceramic; Flooring North America; and Flooring rest of the world are the business segments through which the Calhoun, Ga.-based company operates. MHK also delivers business advantages, such as cost management, quality control, and raw material integrity.
In August, MHK announced its new initiative, “The Waterways Project,” for Tennessee’s forthcoming Environments for the Aging Expo & Conference (EFA). In this project, MHK will demonstrate its latest collection, Urban Shores, at EFA. In addition, through the initiative, the company will offer an additional promotional experience with a free flooring opportunity to qualified registrants and attendees of the conference.
For its second fiscal quarter, ended July 3, 2021, MHK’s net sales increased 44.1% year-over-year to $2.95 billion. The company’s gross profit increased 143.9% from its year-ago value to $902.21 million. Its operating income came in at $404.42 million, versus a $60.96 million operating loss the second quarter of 2020. MHK reported $336.29 million of net earnings during the quarter, compared to a $48.26 million net loss in the prior-year period.
MHK’s revenue is expected to increase 18.1% year-over-year to $11.28 billion in its fiscal year 2021. The company has an impressive earnings surprise history; it beat the consensus EPS estimates in each of the trailing four quarters. MHK’s EPS is estimated to increase 17.2% in the current quarter and 69.9% in the current year. Over the past year, the stock soared 113.2% in price, and over the past nine months it has surged 54.7%.
MHK’s POWR Ratings reflect this promising outlook. The stock has an overall A rating, which equates to a Strong Buy in our proprietary rating system. Also, the stock has a B grade for Value, Momentum, and Quality.
In addition to the POWR Rating grades I’ve just highlighted, one can see MHK’s ratings for Growth, Stability, and Sentiment here. MHK is ranked #3 in the Home Improvement & Goods industry.
Stocks to Avoid:
The Home Depot, Inc. (HD)
World’s largest home improvement retailer, HD, operates 2,300 stores in the U.S., Canada, and Mexico. The Atlanta, Ga., company also runs many big-box format stores in the U.S. and serves mainly homeowners, professional renovators, contractors, property managers, and specialty tradesmen. In addition, HD provides various building materials, installation, and professional service programs for do-it-yourself projects.
HD’s net sales increased 8.1% year-over-year to $41.12 billion for the second quarter, ended August 1, 2021. However, the company’s total operating expenses rose 2.2% from the year-ago value to $7.03 billion. HD’s interest and investment income declined 44.4% from the prior-year quarter to $5 million. Also, its cash and cash equivalents declined 67.7% from the prior-year quarter to $4.57 billion for the six months ended August 1, 2021. HD’s stock price has declined 1.4% over the past month.
HD’s POWR Ratings are consistent with this bleak outlook. The stock has a D grade for Growth. Click here to see the additional POWR Ratings for HD (Momentum, Sentiment, Value, Stability, and Quality). The stock is ranked #27 in the Home Improvement & Goods industry.
The Sherwin-Williams Company (SHW)
Incorporated in 1866, Cleveland, Ohio-based SHW delivers architectural coating, industrial coating, manufacturing, distribution, and sustainability and sells paints, coatings, floor coverings, and related products. The Americas Group; Consumer Brands Group; and Performance Coatings Group are the segments through which the company operates. SHW also serves retailers, dealers, and other third-party distributors through its segments.
Last month, SHW signed an agreement to acquire the European industrial coatings business of Sika AG. Though this agreement may provide the company with high-quality and differentiated businesses that may enhance its profitable growth momentum, it could negatively impact its cost structure.
During the second quarter, ended June 30, 2021, SHW’s net sales increased 16.9% year-over-year to $5.38 billion. However, the company’s net sales in the CBG segment declined 25.4% year-over-year to $731.5 million, while its segment profit decreased 48.3% from its year-ago value to $122.8 million. Furthermore, its adjusted EBITDA declined 19.3% year-over-year to $848.7 million.
SHW’s EPS is expected to decline 1.1% year-over-year to $2.73 in the current quarter ending September 2021.
SHW’s poor prospects are reflected in its POWR Ratings. Click here to access all SHW’s ratings. SHW is ranked #24 in the Home Improvement & Goods industry.
HD shares were trading at $324.61 per share on Thursday morning, up $0.97 (+0.30%). Year-to-date, HD has gained 24.25%, versus a 22.02% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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