DA Davidson Upgrades Home Depot to Buy

You laid out five reasons for your upgrade on Home Depot and I want to start off first with one of the big ones there and that involves the interest rate environment. You think we could see some port, some support there in lower interest rates? Yeah, that that is part of the call. And we don't know if it's going to be next meeting. We don't know if it'll be later in 2024 or early 2025, but we certainly think we're closer to the end of the Fed hiking cycle and there to the beginning of an easing cycle. And, and typically Home Depot stock outperforms in an environment when rates are going down. We've seen that historically. In fact, over the last 2 1/2 years, Home Depot has underperformed the market that that is part of our call that we're getting the stock a lot cheaper than other retailers relative to their 52 week highs. And a lot of that underperformance is coincident with Fed starting, the Fed starting to raise rates. Home Depot outperformed in 2020 and 2021, Then the feds start raising rates and it's underperformed. So in a lot of ways, don't fight the Fed. And we do think, again, it's hard to know exactly which meeting they're going to cut ready. What would you think the next move is to cut rates? What what about the state of the housing market? Obviously a lot of Home Depot's fortunes are tied to the the nature of housing, what we're buying, what we're renovating, etcetera. I know things have been a little bit distorted over the last couple of years coming out of the pandemic, but what is sort of the outlook on the housing side and how that feeds into earnings? Yeah, we would say mixed there a lot of different housing data points and any given week that comes out, we tend to look at existing home sales more than new home sales. Existing home sales have sort of been bouncing along that bottom of 4 million or so annualized homes trading that that's been the last four or five months have been right in that range. More importantly though than than the turnover is home prices. And what we've seen is in the last six months home price appreciation has been up year over year and up year over year at an accelerating pace where the chart is really going like this. And on an absolute basis, home, existing home prices were at an all time high as of last Friday. And and that's really one of the most important drivers of underlying demand for the Home center. So that really does play into our call as well, this idea that we're seeing really strong home price appreciation for existing homes and again, at a record high. Hey, Mike, does the demand at Home Depot come from either where you just said like renovations for existing homes that may get cheaper as rates come down because you can maybe take out a home loan? Does it come people actually moving or does it come from new home sales and you need to kind of furnish and paint and do all that stuff? Yeah, all, all I would say, but, but, but what we've seen historically and what we show in the report and we have lots of data to, to support this is, is more of the spend comes from people who are staying in their home, but they feel like their home is worth more because of rising prices rather than on the turnover. Now the turnover of course, each of the people involved in, in either buying or selling the home are going to spend more than the people who are staying in their home. But we're talking four or five million homes a year. That turnover, if you look at it on a year over year change basis, it's, it's a couple 100,000 more or less this year versus last year. The other 80 million that is sort of staying put in their homes more than you know dwarfs the, the, the, the amount spent for the people who are actually changing homes. Is this also equally good for Lowe's from a macro standpoint? It is what now we've been long time Lowe's bowls. We've been recommending that for the last really 6 1/2 years and and not recommending Home Depot. We did downgrade Lowe's earlier this year and now we're sort of switching to Home Depot. And the reason for that is what we noticed about Lowe's if you go back six years ago is that the margins were about 650 basis points different than Home Depot, lower than it's over the last 6 1/2 years. Lowe's has really closed that margin gap. That's been really good for Lowe's. It's really worked well. What we've seen though is that that sort of played out and we don't see Lowe's closing the margin gap anymore. In fact, one of the points that we made in the in the notes this morning is that the gap is now widening back in won't be both favour. So that that plays in well, more so for Home Depot than Lowe's. Lowe's margins are actually going down South. Listen, we think Lowe's the management team who came on a bunch of years ago have done a great job, but we think that that that that story is sort of play out a little bit more now.