Lowe’s (LOW) and Home Depot (HD) reported earnings in the last couple of days, and business did pick up as promised after a cold start to spring. But that still doesn’t make make HD stock or LOW stock a slam-dunk buy.
Spring is the most important part of the year for home improvement retailers, so weak first-quarter results — hurt by unseasonably cold weather — was not a good way to get HD stock or LOW stock moving in a down year.
Happily for anyone holding Home Depot or Lowe’s stock, sales picked up in the second quarter, as did profits … but serious headwinds still remain. Higher interest rates are a drag on the housing market. Joblessness, job insecurity and wages that don’t keep up with inflation are also hurting traffic to Home Depot and Lowe’s. No wonder HD and LOW stock have been losers and laggards for almost all of 2014 so far.
If you’re looking for a broader bet on housing, you might own both Home Depot stock and Lowe’s stock, since they’ll be lifted by the same changes for the better in the economy. But if you had to chose one — HD stock or LOW stock — to bet on the home improvement sector, which looks like the better buy? Let’s take a look:
HD stock was in negative territory for most of the year-to-date until anticipation for some better-than-expected earnings lifted shares dramatically the last couple of weeks. Indeed, as recently as Aug. 7, HD stock was down 2% for the year-to-date, lagging the S&P 500 by 6 percentage points. After posting quarterly results on Tuesday, HD stock has gained up 8% on the year to match the broader market.
Traffic bounced back sharply after a slow and rainy start to the spring season, and sales came roaring back, boosted by higher ticket (and higher margin) items like major appliances and water heaters. As a result, sales easily topped Wall Street estimates, and earnings per share beat forecasts by 8 cents per share. That’s a big beat.
Most important for anyone holding Home Depot stock, the company raised its full-year outlook, helped by strength in single-family home construction and growth in applications for building permits.
Business is looking up for Home Depot, and shares still look reasonably priced, going for 17 times forward earnings on a long-term growth forecast of 16. The dividend yield of 2.3% adds some incremental upside.
So, how does the competition stack up?
LOW stock sold off sharply Wednesday after a cut to its revenue forecast more than offset good feelings over better-than-expected revenue and earnings. That’s especially disappointing for anyone holding Lowe’s stock because it was just starting to gain some serious momentum.
Heck, before the earnings release, LOW stock was up 4.5% for the year-to-date and had gained 9% in just the last month.
Like Home Deport, Lowe’s bounced back after a slow start to spring and managed to pick up most of those deferred sales later in the quarter. But “most” is the operative word, since Lowe’s wasn’t able to stand by its full-year revenue forecast on track.
For the most recent quarter, earnings beat Street expectations by 2 cents per share — a comfortable margin. And sales came in at $16.6 billion vs. a Wall Street forecast for $16.57 billion. The rest of the year won’t be as strong as once thought, and now LOW stock is paying the price. The company cut its full-year revenue growth target to 4.5% from 5%.
Like HD stock, Lowe’s stock is reasonably priced, going for 16 times forward earnings with a 16% long-term growth forecast. The dividend — good for a yield of 2% — likewise adds some nice incremental upside.
Both HD stock and LOW stock are long-time market-beaters delivering serious outperformance over pretty much any time frame you care to chart. That said, the market has favored Home Depot stock over Lowe’s stock by a wide margin for more than 10 years, and there’s little reason to see that sentiment changing anytime soon.
As a business and a stock, Home Depot has been outperforming Lowe’s for so long that the latter will have to string together several quarters of much better performance to change the Street’s mind. That means an unbroken string of beat-and-raise earnings reports with all the bells and whistles of robust same-store sales gains and margin expansion.
In short, Lowe’s needs to wow the Street.
Until then, you can expect the outperformance of Home Depot’s business and stock to persist. With other things like valuation and dividends being essentially equal, HD stock is a better buy than LOW stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.