Rival home improvement chains Lowe’s Companies, Inc. (LOW) and Home Depot Inc (HD) each put up solid quarterly numbers this week.
Lowe’s reported this morning that earnings per share shot up 40% to $0.98 from $0.70 a year ago, and revenues were up a good 7.8%. Same-store sales were up 7.5%. All told, a very good quarter, particularly given how sluggish economic growth has been — GDP grew at just 0.5% last quarter.
This follows a day after Home Depot also reported better-than-expected earnings. EPS came in at $1.44 per share, up 19% from last year, and revenues were up 9% to $22.76 billion. The street had been expecting EPS of $1.36 and revenues of $22.39 billion. U.S. same-store sales were up 7.4%, and the amount spent per customer jumped to over $60 per trip, a number it hasn’t seen since the go-go days of the pre-2008 housing bust.
For two companies that are facing increasing competition from internet rivals like Amazon.com, Inc. (AMZN), this was a solid quarter all around. But which of the two is the better stock, LOW or HD?
Let’s take a head-to-head look.
Valuation: LOW vs HD
One of my favorite valuation metrics is the cyclically adjusted price/earnings ratio (“CAPE” or “Shiller P/E”) because it smooths out the ups and downs of the economic cycle by using a 10-year average of earnings. Within any given 10-year period, you’re likely to have a boom, a bust and everything in between.
Looking at LOW and HD, we see two stocks that are actually quite pricey by this metric, though in line with one another. Home Depot trades at a CAPE of 42.2 and LOW a CAPE of 39.3. As a point of comparison, the S&P 500 trades at a CAPE of about 26.
Both LOW and HD have inflated CAPEs, though this is due in part to their earnings getting eviscerated during the 2008 meltdown and aftermath. But the key takeaway here is that HD and LOW are being valued very similarly at current prices. Neither would appear to be particularly cheap relative to the other.
Dividend Yield
Neither Lowe’s nor Home Depot is a particularly high-yielding stock — LOW yields about 1.5% and HD about 2% — though both have been consistent dividend raisers over the years.
Home Depot has raised its dividend every year since 2009, and its compound annual growth rate over the past five years is a stellar 22.5%. Lowe’s has raised its dividend every year since 1986 and over the past five years is a solid 20.6%, nearly as high as Home Depot.
And it’s not just dividends. HD and LOW have repurchased an average of 5.3% and 7.6% of their respective shares outstanding per year over the past three years. So, both retailers are clearly committed to their shareholders.
Given the slightly higher yield and growth rate, I’m going to give the nod to Home Depot here, but it’s a close race.
Profitability
By most measures of profitability, Home Depot beats the pants off of Lowe’s. As seen in the chart above, HD consistently generates higher returns on equity and returns on assets than its smaller rival.
Lowe’s has narrowed the gap with Home Depot on gross margins, though HD’s operating margins are consistently higher than those of Lowe’s. So, by really any metric you want to use, Home Depot is a more profitable enterprise.
The Winner: Home Depot or Lowe’s?
So, which of the two home improvement chains in the better buy?
I’d give a slight edge to Home Depot based on its higher levels of profitability. But frankly, if you like one you might as well like both. The two stores essentially sink or swim together based on the same macro factors — namely the health of the U.S. consumer and the health of the housing market.
I’m not wildly enthusiastic about the prospects for consumers these days. Despite all efforts by the Fed, wages aren’t rising in real terms and labor force participation is still pretty lackluster. But I do believe that, with interest rates as low as they are, the housing market should remain strong.
So, to the extent that consumers buy much of anything, it’s reasonable to expect them to continue putting money into their houses.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he did not hold a position in any of the aforementioned securities.
