Cooling US Housing Market May Pressure Home Depot, Lowe's 2022 Sales

Home Depot Inc. and Lowe's Co.s Inc. may warn of a slowdown in 2022 sales when they report their quarterly results next week to reflect a potential cooling in the U.S. housing market and a rapid rise in inflation.

The easing of COVID-19 fears in many parts of the country is encouraging people to get back to their normal routines, dampening demand for home improvement products that had soared during the pandemic.

Also, rising mortgage rates are expected to dent housing demand as buyers will be less keen to invest in their dream homes or spruce them up.

"We expect moderation throughout 2022 to a point where demand is likely at best flattish year-over-year by the back half of the year, and that's on the back of a slowing housing market and consumer confidence," Wedbush Securities analyst Seth Basham told Reuters.

The Context

After two years of robust sales growth, thanks to pandemic-driven demand for tools, paint and gardening equipment from stuck-at-home Americans, both companies are expected to forecast full-year sales growth near levels they saw before the pandemic.

Basham, however, expects sales during spring - a key selling season for home-improvement chains - to remain strong, driven by demand for big-ticket items such as lawn-mowers, barbecue grills and other appliances.

Lowe's has already forecast 2022 sales and profit below estimates late last year, while Home Depot is expected to start providing full-year outlook on Tuesday after a near two-year pause.

The expected impact of rampant cost inflation and sustained supply-chain hurdles on profit margins will also be on top of investors' minds.

The Fundamentals

* Analysts project Home Depot's fiscal 2022 net sales to rise 2.5%, while Lowe's 2022 net sales are expected to rise 1.3%

* Home Depot's fourth-quarter sales are expected to rise 8.1% to $34.87 billion. It is expected to post earnings of $3.18 per share

* Lowe's fourth-quarter sales are expected to rise 2.8% to $20.89 billion. It is expected to post earnings of $1.71 per share

Wall Street Sentiment

* The current average analyst rating for Home Depot is "buy," with a median price target of $425, a 22.1% upside to the stock's last close

* The current average analyst rating for Lowe's is "buy," with a median price target of $285, a 27.4% upside to the stock's last close

* Home Depot shares have risen 27.1% this year and those of Lowe's have gained 30.4%