Cooling inflationary pressures and strengthening home values are likely to spell a recovery for home improvement retailers sooner rather than later, according to Bank of America. Although the firm’s indicator for the home improvement industry still came in negative for August 2023, the signal ticked up from its July reading. “This gives us conviction that the weak sales trends cited by home improvement retailers in 1H23 are now in the rearview mirror … with recovery in YoY sales growth in 2H23 due to less pressure on the consumer from inflation, and less pressure on the housing market from high mortgage rates and low housing turnover,” wrote analyst Elizabeth Suzuki in a Monday note. “The combination of improving fundamentals, a potential shift in investor sentiment toward early-cyclical/recovery sectors, and attractive valuations for the home improvement retail stocks supports our view that now is the time to own stocks like Buy-rated Floor & Décor , Home Depot and Lowe ‘s,” she wrote. Another tailwind comes from higher underlying asset values. BofA said its U.S. Mortgage and Structured Finance Research team now forecasts 6% year-over-year U.S. home price appreciation in 2023 versus a prior forecast of 0%. “Strength in home values should lend longer-term stability for home improvement demand,” Suzuki wrote. The analyst added that improved consumer sentiment toward home improvement spending in the next 12 months could hold spending levels steady in 2023 and 2024, after the pandemic-induced “unprecedented growth” and subsequent dip earlier this year. Suzuki’s $114 price target for Floor & Décor suggests almost 24% upside from its closing price of $92 on Monday. BofA cited FND’s growing number of stores and improved same-store sales growth. Based on Home Depot’s consistent company execution, potential to increase market share and relative resilience, Suzuki set a 12-month price objective of $363 for the stock, for potential upside of more than 14% from Monday’s close. Finally, Suzuki highlighted Lowe’s robust fundamentals as the reason for her $289 price target, which signals an upside of about 33% from Monday’s close. “In addition, LOW has an opportunity to expand margins for several years through continued productivity improvements and product differentiation,” she wrote. — Michael Bloom contributed to this report
