(RTTNews) - Thursday, FBR Capital Markets upgraded Home Depot, Inc. (HD: News ) shares to Outperform from Market Perform, while downgrading Lowe's Companies Inc. (LOW: News ) shares to Market Perform from Outperform.

The brokerage raised its 2009 EPS estimate for Home Depot to $1.53 from $1.48, and its 2010 estimate to $1.70 from $1.58. The brokerage raised its 2009 EPS estimate for Lowe's to $1.26 from $1.24 and its 2010 estimate to $1.40 from $1.34.

Analyst Stephen Chick noted that upside to consensus earnings estimates is higher for HD than for LOW, at this stage. The share price for Lowe's has appreciated enough since the analyst's upgrade to capture a fair amount of pro forma free cash flow yield, assuming the company narrows its budgeted cash capex spending to a ratio to D&A of south of 1x, he considers below 1x defensive.

The analyst said that HD's comp gap below LOW widened unexpectedly in February (-460 bps), yet narrowed again in the months thereafter; and he expects second quarter of 2009 to show sequential improvement in this from first quarter of 2009 (-200 bps). Checks indicate that CA, 12% of HD's store base, for HD is likely on plan: has not gotten better, has not gotten worse.

The analyst would watch foreclosure activity in this market very closely. LOW is more highly indexed to the outdoor seasonal category, 40% of second quarter of 2009 sales versus 35% for HD. This makes LOW slightly more vulnerable in the analyst's outlook, as the sector moves away from the peak of these trends typically set July 4, this season also had a slightly longer tail this year.
On the heels of good May sales, the analyst estimates -5% to -6% in the U.S. for HD, from its June 10, 2009 analyst day. The analyst expects that Lowe's trends were "OK," on plan, while HD seemed to be slightly ahead of plan. LOW tends to generate higher average ticket sales of $63.71 versus HD at $52.67, in part because LOW has a higher % of appliances.

Given that larger ticket sales continue to experience double-digit pressure, the analyst thinks that this difference will contribute to the narrowing of the comp gap between the two. All in, sales trends for HD and LOW are on plan, based upon the analyst's checks and his review of 22 "proxy companies" for current sales trends, suppliers and others.

Currently, HD is up $0.43 or 1.58% and trading at $27.63. Lowe's is currently trading at $23.25, up $0.40 or 1.75%.

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by RTT Staff Writer

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