Home Improvement Throw Down

By Stephen Benz - May 24, 2012 | Tickers: HD, LOW | 0 Comments

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I'm not a handyman.  My abilities are pretty much limited to hanging things on the wall and pouring drain clogger when we get standing water in the shower.  Commercials for The Home Depot Inc. (NYSE: HD) and Lowe's Companies Inc. (NYSE: LOW) would have me believe that after a short visit to their stores, I could be hanging and painting my own dry-wall or building a terraced garden in my backyard next weekend.  While that remains to be seen, I'm more interested in what these companies could do for my portfolio as plays on the improving housing market and overall economy.  I just need to figure out which one...

Valuation

I'll begin by looking at some valuation metrics to see how these two comapre.

At first glance, it appears Lowe's is slightly more attractive when considering just these metrics.  Lowe's stock price took a 10% hit after lowering guidance during their most recent earnings announcement.  Nothing like getting your share price kicked in the teeth to make your stock look cheaper than the major competitor.  However, valuation metrics are meaningless by themselves in a vacuum.  I need to look at sales and earnings growth to see if there's a compelling reason why I should pay a premium for one company over another.  Quality of management and dividend yield are other factors I would take into consideration.

Growth

 Both companies were hit hard by the financial crisis and neither have fully recovered their EPS to pre-crisis levels.  Home Depot looks to have recovered more quickly and has maintained that growth.  Lowe's has been less consistent.  This helps explain why Home Depot has outperformed Lowe's by 45% over the last 5 years.  The dashed lines are based on management guidance from their most recent quarterly earnings announcement.  Both look attractive based on their current price multiples at this anticipated growth rate. 

Comparable store sales is another metric to check out when comparing retail companies.  The story here is similar to that of EPS.  Home Depot recovered faster and has maintained that growth through 2011.  I could not find a comparable store sales guidance from Home Depot management, but Lowe's projects 1% to 3% growth in 2012.

Financial Condition

I have a pretty decent idea how the two companies compare with regards to growth and valuation.  Finally, I want to get a snapshot of their financial picture. 

Both appear healthy and have respectable dividend yields.  There's nothing here to sway my decision one way or the other.

Decision Time

I can see the argument that Lowe's is a beaten down stock and therefore a good value opportunity, however, I don't buy it.  The way I see it, both companies are similarly valued despite Home Depot's superior performance over the last several years.  What may ultimately decide the fate of these two companies is the customer experience.  Speaking from the perspective of a home improvement amateur, these stores can be intimidating to the uninitiated.  As Americans begin buying more homes or renovating their existing home in preparation to sell on a more favorable market, the company that develops the better reputation among everyday consumers will rule the day.  I did a word search for "customer service" and "customer experience" in both company's most recent 10-K.  Lowe's report treats these concepts somewhat vaguely and never really emphasises their importance.  Home Depot, however, lists Customer Service as the first bullet point under their Operational Strategy and dedicates several paragraphs to customer service and their customers.  I'm sold. 

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