Home Depot vs. Lowe's: Why This Home Improvement Giant's Undervalued Rebound Makes It the 2025 Play

The retail sector is in a slow-motion crisis, but two home improvement giants—Home Depot (HD) and Lowe’s (LOW)—are navigating the storm with contrasting strategies. While both face headwinds from high mortgage rates and tepid consumer spending, the divergence in their valuation and execution suggests one is primed for a rebound. For investors, the choice between these two isn’t just about picking the stronger stock—it’s about betting on which company can turn its underappreciated strengths into a catalyst for earnings growth. And right now, Lowe’s looks like the contrarian play.

Valuation Divergence: Lowe’s Is Cheaper, But Why?

Let’s start with the numbers. As of early 2025, Home Depot trades at a forward P/E of 24.15x, reflecting its premium status as the sector’s leader. Lowe’s, by contrast, is valued at 14x forward earnings, a discount of nearly 40%. The gap isn’t just about scale—it’s about sentiment. Analysts have been trimming Lowe’s earnings estimates for months, with Q1 2025 EPS forecasts dropping from $1.81 to $1.68 over two months. Yet, beneath the pessimism lies a company making tangible progress.

The Case for Lowe’s: Cost Discipline and Hidden Growth Levers

Lowe’s is executing a pivot toward high-margin Pro customers and rural markets with ruthless efficiency. Consider its inventory strategy: by reducing stockpiles by $1.3 billion year-over-year, it’s freed up capital while focusing on Pro-centric categories like roofing tools and electrical supplies. This shift isn’t just about cutting costs—it’s about targeting a segment that’s far less sensitive to housing starts than HD’s DIY-heavy model.

Meanwhile, its Total Home Strategy—bolstered by AI partnerships with NVIDIA and OpenAI—is driving omnichannel synergy. Imagine a Pro contractor using Lowe’s app to order materials online, track deliveries in real time, and access personalized recommendations. This integration isn’t just a gimmick; it’s a way to lock in repeat business in a sector where Pro buyers account for $2 trillion in annual spending.

Don’t overlook the dividend. Lowe’s has raised its payout for 12 consecutive years, and its current yield of 2.1% is a buffer against volatility. In contrast, Home Depot’s dividend growth has slowed, reflecting its margin pressures.

Home Depot’s Strengths—and a Critical Weakness

Home Depot’s scale remains unmatched. Its $39.3 billion Q1 2025 revenue estimate (up 8% YoY) underscores its dominance in the category. The "One Home Depot" initiative—focused on tech-driven supply chain and digital tools—is a bold move to future-proof its business. The acquisition of SRS Distribution adds critical Pro services, and its operational resilience (a +2.6% earnings surprise average) is a testament to execution.

But there’s a flaw: its reliance on big-ticket discretionary sales. Kitchen and bath remodels are sensitive to interest rates, and with mortgage rates near 7%, demand is softening. Analysts now project HD’s operating margins to shrink by 90 basis points in Q1, a stark contrast to Lowe’s margin stabilization efforts.

The Earnings Catalyst: Why Q1 2025 Could Be a Tipping Point

For investors, the next few weeks are critical. Home Depot’s Q1 results (due in late May) will test its ability to grow revenue while managing margin pressures. A beat on EPS could narrow the valuation gap, but theStreet’s analysts see limited upside given HD’s reliance on discretionary spending.

Lowe’s, however, has a clearer path to surprise. If it meets or exceeds its $2.90 EPS estimate—despite the lowered expectations—it could trigger a reassessment of its valuation. The Pro segment’s outperformance, combined with rural store contributions, could show the strategy is working. Even a modest rebound in EPS estimates could unlock a 20%+ stock pop.

The Contrarian Play: Buy Lowe’s Before the Narrative Shifts

The market has priced in Lowe’s struggles, but it’s underestimating its comeback potential. The company’s $30 billion in cash and equivalents give it flexibility to double down on Pro tech or acquire smaller competitors. Meanwhile, its forward P/E of 14x offers a margin of safety compared to HD’s frothy multiple.

Home Depot’s moat remains wide, but its valuation demands flawless execution in a tough environment. Lowe’s, at these levels, offers a safer contrarian bet. With a dividend yield that beats its peers and a strategy targeting recession-resilient Pro buyers, it’s the stock to own ahead of Q1 earnings—a moment that could finally turn the tide for this undervalued giant.

Act now before the market catches on.