Which Is the Better Bet as Lumber Prices Fall?

The Fed’s rate hikes are beginning to have their effect on slowing inflation. For example, lumber prices have dropped more than 50% since the central bank started raising interest rates in March.

Timber is an essential building commodity. As a result, changes in timber prices can impact sales at home improvement retailers like Home Depot (HD) and Lowe’s Companies (LOW).

The COVID-19 pandemic has brought about a shift where homes now serve as both living and work spaces for many people. While some companies are recalling their staff back to the office, many workers will no doubt be spending more time at home than they did before the pandemic. As people spend more time at home, the more likely they will see areas that need upgrades.

As a booming housing construction market fueled demand for the building material, timber prices soared. The boom is fading as mortgage costs jumped with rate hikes. As lumber prices surged, the high cost may have left some people requiring upgrades in their homes. Therefore, falling lumber prices may encourage such people to invest in their home improvement projects. 

Let’s see what falling lumber prices could mean for the leading home improvement retailers. 

Home Depot

Home Depot is the world’s largest home improvement retailer, operating a network of more than 2,300 stores. It serves both professional and do-it-yourself (DIY) customers, but draws more of its business from the professional segment. 

In the latest quarter, Home Depot reported a 3.8% year-over-year rise in sales to $38.9 billion. The retailer anticipates a 2% increase in fiscal 2022 revenue. 

Home Depot scores a nine out of 10 from TipRanks’ Smart Score rating system, indicating that the stock has strong potential to outperform market expectations.

Consensus among Wall Street analysts is a Strong Buy rating on Home Depot stock, based on 17 Buys and four Holds. The average Home Depot price forecast of $357.35 implies upside potential of about 16% to current levels. 

Lowe’s Companies

Lowe’s Companies operates more than 1,970 stores across the U.S. and Canada. It serves home improvement professionals and DIY customers, but it tends to rely more on DIY customers for business. 

In the latest quarter, Lowe’s reported a 4% year-over-year decline in sales to $24.4 billion. The retailer expects its fiscal 2022 sales to increase by as much as $1.5 billion, to about $99 billion.

Low’s scores a “Perfect 10” from TipRanks’ Smart Score rating system, indicating that the stock has strong potential to outperform market expectations.

Consensus among Wall Street analysts is a Strong Buy rating on Lowe’s stock, based on 13 Buys and four Holds. The average Lowe’s price target of $236.67 implies upside potential of about 19% to current levels. 

Final Thoughts 

Home Depot and Lowe’s stocks have both declined more than 20% year-to-date. As a result, both stocks offer a discount entry opportunity with markets beginning to show signs of recovery as inflation starts to abate. Looking at the price predictions, LOW stock offers higher upside potential than HD stock.

The falling timber prices could particularly encourage DIY customers who had shelved their home improvement projects to bring them out now. If that turns out to be the case, then Lowe’s seems better-placed to benefit considering its predominantly DIY customer base. 

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