Best Stock to Buy Right Now: Home Depot vs. Lowe's

Home Depot (HD -0.58%) and Lowe's (LOW -0.44%) are the two largest home improvement retailers in America. Both of their stocks slumped in 2022 and 2023 as inflation curbed consumer discretionary spending and rising interest rates chilled the housing market, but they both have rallied by about 20% so far this year as the macro environment has stabilized.

Should investors buy either of these stocks before interest rates decline further and the housing market heats up again?

Image source: Getty Images.

Which company is growing faster?

Home Depot operated 2,345 stores and 780 branches across the U.S., U.S. territories, Canada, and Mexico at the end of its fiscal third quarter. Lowe's operated 1,747 stores, all of which were located in the United States, at the end of its fiscal Q3. It completely shut down its international business by exiting Mexico in 2019 and Canada in 2022.

Since the end of fiscal 2021 (which ended in January 2022 for both companies), Home Depot has expanded its total store count by about 1% while Lowe's has reduced its store count by 11% (mainly due to the sale of its Canadian business). Home Depot expects to open 12 new stores in its fiscal 2024, but Lowe's isn't planning to expand its brick-and-mortar footprint.

Both companies generated strong comparable store sales growth in fiscal 2021 as the housing market heated up again after cooling down during the first year of the pandemic. Both struggled over the following two years amid rising interest rates and adverse weather conditions, but Home Depot fared better than Lowe's during that period.

Data source: Company earnings reports.

For fiscal 2024, Home Depot expects its comps to dip by 2.5%, while Lowe's is guiding for a steeper decline of 3% to 3.5%. Both companies continue to face macroeconomic pressure from higher interest rates and the lingering price impacts of the recent period of high inflation.

From fiscal 2023 to fiscal 2026, analysts expect Home Depot's revenue to grow at a compound annual rate of 4% and for Lowe's to rise at a compound annual rate of less than 1%. We should take those estimates with a grain of salt, but Home Depot's superior scale, overseas exposure, and new store openings could help it stay ahead of Lowe's for the foreseeable future.

Which company is more profitable?

From fiscal 2021 to fiscal 2023, Home Depot's annual gross margin dipped slightly from 33.6% to 33.4%. Lowe's gross margin rose from 33.3% to 33.4%. This suggests both companies have comparable pricing power.

But on the bottom line, the comparison is a bit messier. Home Depot's earnings per share (EPS) growth roughly followed its revenues, but Lowe's experienced a steep earnings decline in fiscal 2022 after it divested its Canadian business. Its earnings growth accelerated again in fiscal 2023 after it lapped that sale, trimmed its workforce, and reined in its other expenses.

Data source: Company earnings reports.

For fiscal 2024, Home Depot expects its EPS to dip 2%, while Lowe's anticipates a 9% to 10% decline on an adjusted basis (which excludes the charges from the divestment of its Canadian business). From fiscal 2023 to fiscal 2026, analysts expect Home Depot's EPS to grow at a compound annual rate of 4%, but foresee Lowe's EPS rising at an anemic compound annual rate of 1%.

Which stock is a better value?

Home Depot trades at 28 times next year's earnings, while Lowe's has a multiple of 22. But Home Depot's stronger growth justifies its higher valuation, and its dividend yield of 2.2% also tops Lowe's yield of 1.7%. I wouldn't rush to buy either of these stocks before the macroeconomic environment warms up a bit more, but Home Depot is clearly a better play on the housing market's eventual recovery than Lowe's right now.