The homebuilding stocks were battered this week when luxury builder Toll Brothers Inc. (NYSE: TOL) released lower-than-expected earnings despite reporting revenues that were up 32% from last year. Does this mean that the homebuilding and home improvement recovery is over? The retail analysts at UBS A.G. (NYSE: UBS) say not by a long shot, and look for solid fourth-quarter earnings to be reported.
When the great recession hit in 2008, consumers hunkered down and new home purchasing came to a standstill. Homeowners flocked to The Home Depot Inc. (NYSE: HD) and Lowe's Companies Inc. (NYSE: LOW) to maintain and repair what they had with low expectations. With an improving economy and a strengthening housing market, consumers are still flocking to the stores to upgrade their current homes or buy products for their new ones.
In a research report released today UBS maintains that the home improvement recovery is still in the early innings. While expectations have risen, the analysts think both Home Depot and Lowe's have a lot of earnings-per-share power, and they are confident both retailers still have plenty of room to run on the road to peak earnings. The momentum towards those objectives will overcome loftier expectations to make these stocks respond well to their fourth-quarter results.
UBS is not the only firm on Wall St. that likes home improvement. Oppenheimer today also upgraded Home Depot to Outperform and raised its price target from $67 to $76. Oppenheimer agrees with the thesis that both Home Depot and Lowe's are well positioned to capitalize on improving demand trends in the home improvement sector and, over time, to surprise investors with solid and persistent sales comparisons and EPS upside. The key to this thinking is that the shares should maintain their current high-teens multiple as fundamentals improve and as monies seek a liquid place to play U.S. housing.
In a counter move, both stocks were downgraded to Hold today at Stifel Financial Corp. (NYSE: SF). It was basically a valuation call that both stocks have the best scenarios priced in. The Wall St. consensus price target for Home Depot is $69.50. For Lowe's, the consensus estimate is $38.
The bottom line for investors is that the housing recovery has gone on for months, not years. After a debacle like the 2008 recession and its aftermath, it is entirely possible for sales strength to persist well in to 2013 and beyond.
Filed under: 24/7 Wall St. Wire, Analyst Calls, Housing, Retail Tagged: featured, HD, LOW, SF, TOL, UBS