Home Depot’s earnings per share of $2.09 on $26.5 billion of sales, against analysts’ average EPS outlook of $2.16, and its same-store sales growth of only 3.2%, against the consunsus outlook of 4.5%, was enough to get tongues wagging.
After all, the bears growled, Lowe’s now has a hot new leader in Marvin Ellison, and Home Depot’s management couldn’t be picked out of a lineup. Ellison is a “superstar,” as one TV pundit put it.
The Case for Lowe’s Stock
Personally, I’m a fan of Marvin Ellison. I thought he could save JC Penney (NYSE:JCP). He couldn’t. Maybe no one can. His knowledge of store logistics is a better fit for Lowe’s, but does that make the stock better than the long-time category leader, HD stock?
HD stock and LOW stock tends to move in tandem. Home Depot stock and LOW stock have doubled in value over the last five years. Neither stock has been a bad investment.
Over five years, HD stock has only done slightly better than LOW stock. Over the last year, and especially since Ellison was recruited, HD stock has underperformed LOW stock.
In Q4, Lowe’s EPS came in at 80 cents excluding certain charges, The adjusted EPS of 80 cents met the consensus outlook. But its revenue of $15.6 billion (about 70% that of Home Depot’s) came up short of the $15.7 billion consensus outlook. Lowe’s Q4 loss per share, including the charges, was $1.03. The company’s annual EPS of $2.84 per share, however, justified a hike in the quarterly dividend, from 41 cents to 48 cents.
The point here being, there’s still cleanup to do on aisle three. Ellison admitted as much in his earnings call, saying the company’s computer infrastructure still needs to be transformed, and it needs to do a better job of selling to contractors.
The Case for HD Stock
Home Depot’s miss was a miss only when compared with expectations.
Home Depot’s sales have been steadily increasing 7%-9% for years, and the growth of its net income accelerated in fiscal 2019, compared with the year before. Its earnings miss was the result of cold weather and a slowing real estate market. Smart investment groups seeking long-term returns are stepping in on the stock’s weakness, and they’re bragging about it.
Home Depot’s balance sheet is still stronger than that of Lowe’s, its cash flow is more robust, and HD hiked the dividend on HD stock 32% to a fat $1.36 per share. Thus, today’s yield on Home Depot stock is 2.96%, despite the continuing rise of HD stock. To an aging income investor, this is music to the ears.
Contractors are the secret to Home Depot’s success. Contractors get discounts and their own entrance at my Home Depot store. Small contractors, the folks who might put an addition on your house or replace your kitchen, are especially prized by Home Depot, one reason it’s backing an outsourced delivery start-up called Roadie, which can make same-day deliveries to job sites for the same prices that HD charges.
Ellison can narrow the gap betwee LOW and HD, in other words, but there’s still a gap between them.
The Bottom Line on HD Stock and LOW Stock
Whether you choose to buy HD stock or LOW stock depends on your time horizon.
If you’re looking for a quick return on your investment, Lowe’s stock might indeed be better because Marvin Ellison is a good manager and there’s still room for improvement. at LOW
But if you’re looking for a long-term holding, and/or if you’re an income investor, HD stock is a better call. Just remember, however, that both HD stock and LOW stock are so strong that you can’t really go wrong.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.