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)?
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.
