Jaime Katz: Wide-moat companies Home Depot and Lowe's both reported their fourth-quarter results this week, delivering same-store sales that were a bit lighter than we had forecast, spoiled by a wet winter and a difficult comparison to 2017's hurricane season.
However, the outlook for the year ahead, with Home Depot calling for 5% and Lowe's predicting 3% same-store sales growth in 2019 implies the slowing improvement of the housing market hasn't hindered the ability for the market leaders to grow their top lines.
With housing turnover slowing as lower-priced homes remain scarce and interest rates remain off their lows, there are some caution signs for these businesses. However, still rising home prices and the aging housing stock are mitigating factors that continue to help offset these headwinds.
At this time we view both Home Depot and Lowe's shares as fairly valued. We have slower growth embedded in both models ahead, given where we are in the current economic cycle are the market share gains the businesses have already captured. Our $170 fair value on Home Depot is contingent on 3.5% sales growth and 20 basis points of operating margin expansion, on average, while our $98 fair value at Lowe's incorporates 2.5% sales increases and 20 basis points of operating margin improvement annually. We expect both companies to maintain their market leadership positions and generate solid ROICs, supporting our wide moat ratings.