Deutsche Bank analyst lowers his 2007 estimates for home-improvement retailers on bleak housing forecast

A Deutsche Bank analyst downgraded shares of home-improvement retailers The Home Depot Inc. and Lowe's Cos. on Monday, saying that a recovery in the U.S. housing market is further off than he previously thought.

Deutsche Bank's Mike Baker now has a "Hold" rating on both stocks, saying that economic indicators and business trends from suppliers suggest a later-than-expected recovery. He said his "Buy" rating on each company was based on a recovery in housing and demand for home improvement products in late 2007 or early 2008.

Even after 18 months of year-over-year housing declines, the latest month's data was the worst yet, with existing home sales down 19.1 percent year-over-year, Baker wrote in a client note.

Baker also said inventories are at an all-time high, which is pressuring home prices.

The turmoil in the mortgage market hurt suppliers, Baker said, especially appliance vendors with big-ticket items for sale in home centers.

Baker said Wall Street's 2008 earnings per share estimate does not fully reflect persistent weakness in the U.S. housing market. For full-year 2008, analysts forecast $2.37 in earnings per share for Home Depot and $1.95 in earnings per share for Lowe's.

He lowered his 2007 estimate for Home Depot to $2.38 from $2.40 per share, and for Lowe's to $1.92 per share from $1.97.

The unknown is determining when this negative spiral will reverse, and our call now is that the recovery in housing is going to take longer than expected.

Shares of Home Depot gave up 53 cents at $29.87 in early trading, after ending at $30.40 on Friday.

Source - CNNMoney