The Home Improvement Sector is ‘Better Than You Think’

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By Sam Boughedda

In a note on Tuesday, a Morgan Stanley analyst provided positive commentary on home improvement stocks, saying the sector is “better than you think.”

“Our updated regression-based ‘Trend’ Demand model suggests reversion of ‘excess’ dollars is almost complete. Based on inputs from U.S. Econ and Housing strategists, we expect the Home Improvement category to grow 1.4% in ’23, meaning HD and LOW could comp positively if they hold share,” wrote the analyst.

He explained that the market may be looking for a multi-year reversion, but the category could grow again in 2023.

“Based on forecasts from U.S. Econ and Housing strategists, our model produces 1.4% ‘Trend’ Demand growth in ’23, with decelerating quarterly growth throughout the year. We expect sharply negative Existing Home Sales growth in 2H’22 and 1H’23 to drag down demand and produce negative retail sales growth in Q4’23. But as long as the housing market and GDP grow modestly thereafter, we also see a theoretical path to growth in ’24 as well. Since the entirety of the ‘excess’ wallet share-driven dollars should be given back by the end of ’22, there should no longer be a significant gap between ‘Trend’-Implied Retail Sales and actual Retail Sales in ’23 and beyond,” the analyst added.

Focusing specifically on Home Depot (NYSE:) and Lowe’s (NYSE:), the analyst explained that they have historically outgrown the broader Home Improvement category, so “if positive trend demand materializes in ’23, HD and LOW could comp positively.”

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