The end of the Covid-19 pandemic could ease the demand for Home Depot Inc. (HD, Financial) and the Lowe's Companies Inc. (LOW, Financial) home improvement supplies as people will spend less time at home, but it won't end the run-up in the shares of the two companies.
The two retailers reported strong fourth-quarter financial results earlier this week. Home Depot reported net income of $2.65 per share, up from $2.28 per share a year earlier, and raised its dividend by 10%. Lowe's reported a net income of $1.32 per share, up from 66 cents per share a year ago.
Nonetheless, investors sold off both companies' shares as they expect sales of home improvement supplies to taper off once the Covid-19 pandemic is over and the pace of home improvements eases.
Still, the two companies are in a position to prosper beyond the pandemic, as they have plenty of moat to defend their economic castles from the competition. Like scale, the cost savings associated with a larger corporate size, and scope, the cost savings related to the offering to sell different products.
Then there's bundling, the package of different products to create unique consumer offerings. And there's the integration of their supply chain activities, which creates a formidable barrier of entry for new competitors.
Barriers to entry have allowed the two companies to maintain high economic profits over the last decade. Currently, Home Depot's economic profit stands at 28.93% while Lowe's is 13.44%.
| Company | ROIC | WACC | ROIC-WACC (Economic profit) |
| Home Depot | 35.66% | 6.73% | 28.93% |
| Lowe's | 21.75% | 8.31% | 13.44% |
Meanwhile, the two retailers have been growing their revenues and profits at healthy rates, pay a good dividend and are fairly valued.
| Company | Home Depot | Lowes |
| Three-year Revenue Growth (%) | 9.4 | 7.9 |
| Three-year Ebitda Growth (%) | 9.9 | 5.6 |
| Current Operating Margin (%) | 14.01 | 10.64 |
| Annual Dividend (%) | 2.18 | 1.42 |
| Market Price | $259.97 | $162.31 |
| Intrinsic Value | $271.94 | $142.36 |
Economic profit is a measure of how effectively a company allocates the money it raises in capital markets. A positive economic profit means the company delivers higher returns on invested capital than the opportunity cost of that capital, also known as weighted average cost of capital.
Together with revenue growth, economic profit determines the value the company creates.
Economic profit is also a measure of a company's competitive advantage.
Apparently, Home Depot and Lowe's management are doing an excellent job allocating capital and protecting their competitive advantages.
That's why they prospered before the Covid-19 pandemic, and they will continue to thrive long after.
Disclosure: No positions.
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