It looks like everyone on lockdown turned to home improvement to manage stress. Both Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) reported strong results for the quarter ending in early May. HD stock is now up 9% on the year and LOW is down just 0.5%. Remember, the average S&P 500 stock remains down 8%.
The numbers at Lowe’s were the bigger surprise. Comparable-store sales were up 11%. Net income was up 35%, to $1.76 per share, making a higher dividend payout of 55 cents per share affordable.
Home Depot numbers were called “disappointing,” because increased costs of dealing with the virus ate into profits. Sales were up 7%, but net earnings were down nearly 11%, leaving $2.08 of earnings per share to pay a dividend of $1.50 per share.
What’s Different About LOW and HD Stock?
Differences between the two hardware chains also helped explain the difference in results.
Margaret Reid, a senior portfolio manager at Union Bank in San Francisco, noted that Lowe’s caters specifically to homeowners. Many went to the store during the quarter to turn homes into more effective offices. Others took on long-delayed projects from to-do lists. Reid said Home Depot has the larger share of the professional market. Many contractors were hit by the virus, hurting growth.
This creates two unknowns for investors. Did Lowe’s just get summer revenue in the spring? Also, what will happen as the impact of mass unemployment hits the sector?
Right now, analysts aren’t thinking that way. Only three of 24 analysts following Lowe’s for TipRanks have it as anything but a buy. The highest one-year price target of $150 per share would be a gain of over 25% from the May 21 opening price of almost $118. The average price target implies 6.4% upside.
They’re not quite as optimistic about Home Depot. There, 16 of 22 scream buy and there is an average price target of nearly $250. That’s just 4.5% above its current price.
The Marvin Ellison Touch
The greater optimism over Lowe’s must be due to CEO Marvin Ellison, a former Home Depot executive. He jumped to Lowe’s from now-bankrupt J.C. Penney (NYSE:JCP) two years ago.
Ellison’s career focus has been on logistics and technology. He proved a bad fit at Penney but recognized it and left before it crashed.
Ellison has proven an excellent fit at Lowe’s. His focus on execution has helped maintain Lowe’s supply chain. He also invested heavily in e-commerce, and the company is now benefitting from that.
It’s still not perfect. Lowe’s delivery of online orders can be slow. Home Depot’s in-store lockers scaled well for the massive increase in business from the novel coronavirus. Ellison notes both stores resist Amazon (NASDAQ:AMZN) because a lot of their merchandise is bulky. Stores also make returns and follow-on purchases easy.
The Bottom Line on Home Improvement Stocks
Since Ellison came on board, Lowe’s has been a better buy for investors than Home Depot. Lowe’s capital gain of 39% beats Home Depot’s 27% gain.
But that’s not why you buy these stocks. You buy them for income. On that basis HD stock is still the superior investment, yielding 2.5% against Lowe’s 1.9%. Home Depot’s dividend has also risen nearly 50% over the last two years.
Investors have been flocking to both stocks because those dividends are safe. They are well-supported by earnings. The yield is also superior to that of a government bond, and any capital gains are gravy. Both these companies are well-managed, relatively Amazon-proof and benefit from rising real estate prices.
But there are risks. The coronavirus is bringing a terrible recession in its wake. These companies are sensitive to changes in the economy, and that danger signal means they’re fully valued.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
