Lowe's Outshines Home Depot as Morningstar Flags Valuation Gap

Morningstar's Dave Sekera has weighed in on the home-improvement stocks Home Depot (HD) and Lowe's Companies (LOW), saying that one of them offers a more attractive valuation than the other. According to Sekera, Lowe's is currently trading at a 15% discount to its fair value estimate of $255.

Sekera pointed out that while both companies are dealing with a weak housing market, Home Depot's stock remains above Morningstar's estimated intrinsic value. In contrast, Lowe's has fallen 11% year-to-date, which Sekera sees as an opportunity for the stock to rise.

The analyst cited Home Depot's Q2 operating margin of 14.7%, which fell from 15.3% in the same period last year. He warned that higher mortgage costs and housing pressures could continue to weigh on home-improvement spending, making it difficult for Home Depot to maintain its profit margins.

Sekera expects Lowe's to eventually produce about 3% annual comparable-sales growth and a 13.7% operating margin, which is above what the market currently appears to anticipate. He views the stock as a more attractive option due to its lower valuation and stronger long-term prospects.