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Home Depot and Lowe’s Look Like Good Long-Term Investments

May 30, 2014 | About:
kcpl

kcpl

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After the biggest recession of this decade, the housing market has shown signs of recovery. The sale of new homes has been constantly increasing, while the mortgage rates are decreasing. In addition to these, existing homes sales have also increased 6% from a year-ago period. A decline in mortgage rates has lured people to buy more homes, which has created demand for home improvement retailers as new occupants spend on improving their new homes. And because of this, players in this industry such as Home Depot (HD) and Lowe’s (LOW) have performed well.

The recovery of the housing market can be identified from the fact that both the companies have reported some solid numbers.

The Recovery in Progress

This recovery has benefited most of the companies in this industry. For example, Valspar, a coating and paint manufacturer, has also been witnessing an increase in demand for its products. Its revenue increased in the recent quarter as compared to last year. Its earnings increased 13%, which was more than the consensus estimate. And going forward, management at Valspar is confident of a bright future since it expects the consumer demand to increase.

Both the companies are perfectly placed for growth, and have provided solid returns to their investors. This makes it a difficult choice for investors to pick one stock.

A Look at Home Depot and Lowe's

Over the last five years, Home Depot’s stock price has appreciated much more than that of Lowe’s, but the latter is making a lot of effort to grow.

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Lowe’s has enhanced its product portfolio to attract more customers and apart from opening new stores it has remodelled the existing ones. In addition to this, it has lowered the prices of a number of products to attract budget conscious customers.

But in spite of all these changes, Lowe's could not perform well in the recent quarter. Although its revenue grew 7% to $12.96 billion, its earnings could not meet analysts’ expectations. This was mainly on account of the mismanagement of costs, which led to a weaker margin.

On the other hand, its peer Home Depot seems to be at a far better position from Lowe’s. Home Depot reported some solid numbers, which were more than the analyst’s expectations. Its revenue increased, mainly driven by a rise in the number of transactions and a rise in the average ticket. Also, it saw a considerable increase in its earnings.

Same store sales increased 7.4% as compared to Lowe’s 6.2%. The increased growth of Home Depot was mainly on account of the merchandising and tailored marketing efforts it had put in. In addition to this, Home Depot has a much larger market share of 18.7% compared to Lowe’s 15.2%. Thus, for Lowe's, it is a matter of time until it reaches to the level of Home Depot.

Strategies

Home Depot has made various strategic moves to lure customers during this time of the year. Its recently launched mobile app will make shopping easier for consumers. Along with that, it is making considerable changes in its website to make its online operations even better. It would also launch new products such as Nest Protect smoke, carbon monoxide detector, Cree TrueWhite bulb and many others which will boost its store traffic

It is expected that home sales would grow 5% to 6% next year. According to a survey done by national association of realtors, home prices will increase by 6% by the end of 2014. All these factors make Home depot’s future highly optimistic.

But as far as numbers are concerned, both Home Depot and Lowe’s are almost equally matched in terms of valuation. Home Depot has a trailing P/E of 21.3, while Lowe’s has a trailing P/E of 22.5. Looking at these numbers Home Depot looks cheaper and it offers higher dividend of 2% , whereas Lowe’s pays a dividend of only 1.5%.

Conclusion

Moreover, Home Depot has wider network with around 2,300 stores as compared to Lowe’s 1,825 stores. Thus, Home depot has an edge over its peer as it has more number of stores to attract more customers. Considering all these factors Home Depot seems to a better investment option.


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