Here's What Home Depot and Lowe's Just Told Stock Market Investors About the Broader Economy | The Motley Fool (2024)

Home Depot (HD -0.02%) and Lowe's (LOW -0.00%) have a combined market cap of over half a trillion dollars. So, when they report earnings, the market tends to listen.

Both home improvement giants act as bellwethers for the broader economy, the health of the consumer, and the housing market.

Here are some key takeaways from their recent reports and whether either dividend stock is worth buying now.

Guidance cuts

Wall Street hates uncertainty. So, it's a bad look when companies fall short of expectations.

Home Depot and Lowe's just reported decent results, but both companies cut their full-year guidance.

Home Depot's initial guidance called for 1% growth in diluted earnings per share (EPS) and a 1% increase in sales. But this fiscal year has 53 weeks, so considering that additional week would mean comparable sales and earnings would be slightly down.

Home Depot's updated guidance as of the second quarter is for fiscal 2024 comparable sales to decline 3% to 4% and adjusted EPS to decline slightly even with the benefit of the 53rd week. Operating margin is expected to be 13.8% to 13.9% compared to an initial estimate of 14.1%.

Meanwhile, Lowe's expected full-year 2024 sales of $84 billion to $85 billion -- down 2% to 3% on a comparable basis. It was guiding for an operating margin of 12.6% to 12.7% and diluted EPS of $12 to $12.30 compared to $13.20 in fiscal 2023. Its new guidance calls for $82.7 billion to $83.2 billion in sales, a 12.4% to 12.5% operating margin, and adjusted EPS of $11.70 to $11.90.

In sum, Lowe's revision is slightly worse than Home Depot's, but both companies are seeing margin compression. They are forecasting lower sales, adjusted EPS, and operating margins than last year.

A worsening situation

Home Depot blamed higher interest rates, macroeconomic uncertainty, and bad weather for softness in spring home improvement projects. The lower end of its updated guidance range is based on additional pressure on consumers in the second half of the year.

Similarly, Lowe's continues to discuss interest rates and inflation pressures. Its customers are being patient and not rushing to spend on do-it-yourself (DIY) home improvement projects.

In other words, there's no catalyst for business to pick up in the short term.

Facing limited options during the pandemic, consumers shifted their spending away from services toward goods spending, which led to a surge in demand for products sold by Home Depot and Lowe's, and altered the home improvement spending cycle. Consumers don't always buy big-ticket items like grills and patio furniture. So the pandemic basically pulled forward a lot of those sales and concentrated them in a short time frame. The good news is that we are now a few years removed from that unusual period. And Home Depot said that it is almost done working through that pull-through.

Lower interest rates, paired with consumers delaying purchases since the pandemic, could result in an outsize boom in sales. But the timing of the recovery remains uncertain.

Context is key

Both companies are doing just fine during this slowdown. Slightly lower sales and earnings sound bad out of context. But compared to record highs and a multiyear period of blistering growth, the results are still impressive.

The following chart shows why Home Depot and Lowe's are a great value despite their slowing growth.

HD EPS Diluted (TTM) data by YCharts

Both companies' earnings are significantly higher than pre-pandemic. They also have healthy payout ratios, which indicate that their dividends are affordable and that they can continue to raise the payout even if earnings growth stalls.

In late March, Home Depot announced the $18.25 billion acquisition of SRS Distribution -- allowing the company to take market share and invest in growth even during a slowdown. If the slowdown were worse, Home Depot probably wouldn't be making big moves and would choose a more cautious approach.

Home Depot and Lowe's both trade at discounted price-to-earnings (P/E) ratios compared to the S&P 500 index average of 29.2 -- suggesting they are a good value. However, both companies' 10-year median P/E ratios are around 22 or 23 -- suggesting they aren't exactly in bargain-bin territory, either.

Home Depot is much larger than Lowe's and is generally seen as the industry leader -- so it's understandable why it has a higher valuation. Home Depot also has a 2.4% dividend yield compared to 1.9% for Lowe's.

Take a long-term perspective with Home Depot and Lowe's

Home Depot and Lowe's are cyclical companies, but not so cyclical that they fall apart during a slowdown.

Stable and growing dividends incentivize holding both stocks through periods of volatility. The longer consumers delay home improvement and DIY purchases -- the tighter the coiled spring and the greater the potential boom when interest rates begin coming down.

When excellent companies are a good value and out of favor for short-term reasons, its usually a great buying opportunity. Home Depot and Lowe's have what it takes to manage through a cyclical slowdown. Investors may want to consider a 50/50 split in both top dividend stocks.