Home Depot vs. Lowe's: Which is the Best Investment as Q2 Results Approach?

Looking ahead to next week’s earnings lineup, retail earnings from Home Depot HD and Lowe’s LOW will be a highlight, and it may be a worthy topic of whether it’s worth buying stock in either of these home improvement companies at the moment.

Subdued by tariff headwinds earlier in the year, Home Depot and Lowe’s stock have started to gain momentum ahead of their Q2 reports, with both now up +2% year to date, as HD has risen over +8% this month and LOW has spiked +13%.

Home Depot & Lowe’s Q2 Expectations

Set to report Q2 results next Tuesday, August 19, Zacks' projections call for Home Depot’s quarterly sales to be up 5% to $45.51 billion compared to $43.18 billion a year ago. On the bottom line, Home Depot’s Q2 earnings are expected to be up roughly 1% to $4.71 per share from EPS of $4.67 in the prior year quarter.

As for Lowe’s, which will be reporting on Wednesday, August 20, its Q2 sales are thought to have risen nearly 2% to $23.99 billion versus $23.59 billion in the prior period. Lowe’s Q2 EPS is expected to be up 3% to $4.24 from $4.10 in the comparative quarter.  

Home Depot & Lowe’s Tarriff Strategies

Striving to move past the impact of higher tariffs, Lowe’s has been more vulnerable to cost increases as the company relies more heavily on imports from China, Canada, and Mexico. However, Lowe’s CEO Marvin Ellison has emphasized competitive pricing and other internal tools to minimize customer impact, such as diversifying and restructuring its supply chains and even redesigning some products to avoid components that are vulnerable to steeper tariffs.

Home Depot, on the other hand, has been ahead of the curve in terms of its diversified supply chain, as over 50% of its products are sourced from U.S. suppliers, with no foreign country accounting for more than 10% of its sourcing purchases. Home Depot has also strived to shield its customers from tariff impacts by not aggresively raising it prices, while replacing individual items that may be impacted by higher costs.

HD & LOW Valuation Comparison

In terms of valuation, Lowe’s stock stands out at 20.5X forward earnings compared to Home Depot’s 26.6X. Notably, Lowe’s offers a slight discount to their Zacks Retail-Home Furnishings Industry average of 21X forward earnings and the benchmark S&P 500’s 24.7X. Furthermore, LOW also trades under the optimum level of less than 2X sales, with Home Depot at 2.4X.

HD & LOW Dividend Comparison

While valuation may be a deciding factor for some investors regarding which of these home improvement retailers to choose from, Home Depot’s 2.3% annual dividend yield certainly boost its value to shareholders and tops Lowe’s 1.9%. That said, Home Depot and Lowe’s annual dividends are both above the industry average of 1.06% and the S&P 500's average of 1.15%.

Bottom Line

Home Depot and Lowe’s Q2 reports will be critical to assessing whether they are moving past tariff headwinds. In this regard, Home Depot has been the more favorable investment when considering its diversified supply chain. Still, a cheaper stock price and valuation certainly makes Lowe’s stock more appealing to some investors.

For now, both stocks land a Zacks Rank #3 (Hold) as reaching or exceeding their Q2 expectations, and the ability to offer favorable guidance will be crucial to sustaining the recent momentum in HD and LOW shares.

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This article originally published on Zacks Investment Research (zacks.com).

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