Home Improvement Smackdown! HD vs. LOW Stock

So here we go! We have two extraordinary home improvement companies with global brand names and decades of success. You really should own one of them in your long-term diversified portfolio, but which one? Do you go with Home Depot, Inc (NYSE:HD) or Lowe’s Companies, Inc. (NYSE:LOW)?

Lowes (NYSE:LOW)Both just reported earnings, so let’s look at those numbers first and then check financials and valuation.

Home Depot blew out estimates. Sales were $19.2 billion for the fourth quarter, up 8.3%, and comps increased at a very robust 7.9%. Earnings per share for HD stock was $1.3 billion or $1 per share, up from $1 billion or 73 cents per share. Yes, that’s a 37% year-over-year increase for HD stock.

For the 2014 fiscal year, Home Depot sales were $83 billion, up 5.5%, with comps up 5.3%. EPS for HD stock was $4.56 per share, up from $2.76.

These are, simply put, amazing numbers for HD stock. The fourth-quarter comps in particular show the strength of the housing sector and home improvement in general. Home Depot also authorized an $18 billion share repurchase program, boosted the dividend by 26% to 59 cents per share, and expects EPS of $5.14 in 2015, up 13% after factoring in the repurchases.

Home Depot has $1.7 billion in cash, and almost $17 billion in long-term debt that costs a little more than 5% in interest. I wish the debt were lower because it knocks $800 million off its net income, which would otherwise be $6.3 billion.

So the stock is trading at $115, which is about 22x 2015 earnings. It is pricey considering analyst estimates of 15% long-term EPS growth, but I give it a 10% premium for being a world-class brand name and 10% premium for its annual free cash flow of $6.8 billion. So I would consider fair value to be 18x, or $92. It’s overvalued at this price.

Jumping to Lowe’s, sales were $12.5 billion for the fourth quarter, up 7.6%, and comps increased at a 7.4%. EPS for LOW stock was $450 million or 46 cents per share, up from $306 million or 29 cents per share. That’s a 50% year-over-year increase for LOW stock.

For 2014, Lowe’s sales were $56 billion, up 5.5%. EPS for LOW stock was $2.71 per share, up from $2.14, or 27%.

Thus, just like its competitor, Lowe’s tore it up in both the quarter and the year.

Lowe’s has $945 million in cash, and $10.8 billion in long-term debt that also costs a little more than 5% in interest.

So the stock is at $74.30 and trades at 23x expected 2015 earnings of $3.28. It is also comparatively expensive considering analyst estimates of 18% long-term EPS growth, and I give it a 10% premium for being a world-class brand name and 10% premium for its annual free cash flow of $4.1 billion. So I would consider fair value to be 21x, or $68. It’s also overvalued at this price, but not nearly as much as Home Depot.

So which do you choose? There really isn’t a bad long-term choice here. Lowe’s is closer to fair value, so you may see more appreciation sooner than Home Depot. It also seems to have higher long-term earnings growth.

As of this writing, Lawrence Meyers owned shares of HD.

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