Home Depot, Lowes, Neither, Both
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Not since the rivalry between Best Buy Co. and Circuit City has there been a duopoly in a specialty retail space that commanded a more singular battle for both customer and investor loyalty than the one that exists between The Home Depot (NYSE: HD) and The Lowe’s Companies (NYSE: LOW). Now, in the wake of very different earnings reports for the two companies, diametrically opposed analyst opinions, a potential recovery in the housing market and a sputtering economy, investors are left to consider if one, both or neither of these companies should be included in their respective portfolios.
The Housing Landscape
Unlike the battles that have been fought between easily differentiated competitors, arguably the largest factor facing both Home Depot and Lowe’s is the strength of the housing market. The belief is that as goes housing, so goes home improvement. While one might argue that the ability of an individual to buy a home and his or her interest in improving or maintaining the home that he or she has already purchased are not directly correlated, the principal is generally true.
As some evidence that the housing market is firming, the Case-Schiller Index has risen for the previous four months and housing starts are up about 22% over a year ago. Neither of these factors are sufficient for a prudent investor to confidently declare the peril to be over, but they offer hope that things are heading in the right direction. If this is, in fact, the case, the environment in which these two companies can be considered is one that should be favorable for their respective successes over the medium and longer-terms.
Battle of the “Experts”
It seems that for every analyst that sees Home Depot as the stronger competitor, there is another that sees Lowe’s as the stronger long-term play. At each company’s most recent earnings announcement, the results were very different. Home Depot announces earnings of $1.01 per share against expectations of $0.97; this represents year-over-year growth of over 17% basis on earnings of $0.86 a year ago. Home Depot raised guidance for the rest of the year. At the other end of the spectrum, Lowe’s reported a 2% decline in revenue, largely on reduced comps, and guidance for the rest of the year was lowered. Despite these clearly divergent figures, certain analysts see the weak numbers for Lowe’s as a part of the process while the company works to remake its image. It is this process that gives these believers hope that the long-term prospect for Lowe’s is preferable to that for Home Depot.
Trading the News
Unlike a retail makeover, like the one being attempted by J.C. Penney Company (NYSE: JCP), there are too many external factors to bet on Lowe’s during the process. Not only does a clothing retailer have greater flexibility in the midst of a transition to drive interim business, J.C. Penney is working towards rapidly becoming more technologically advanced. This type of face lift is likely to be well received. The similarity between J.C. Penney's transition and the one under way at Lowe's is that each is an attempt to change how customers view the stores. For J.C. Penney this means using technology to allow for a more interactive sales force initially and then an attempt to change how individuals shop altogether. In the case of Lowe's, the company is simply trying to shift to an "everyday low price model," in the hope that customers will be less sale and promotion driven.
For Lowe’s, if the rebound in the housing market does not solidify and strengthen, the entire sector may weaken. For this to take place at a time that one of the two major players is without a unified identity could be disastrous for Lowe’s and a coup for Home Depot. Along these lines, and based on the solid dividend history that Home Depot offers investors, an underweighted allocation to Home Depot is the way to play the home improvement space. It is not yet time to jump in with both feet, but some measure of exposure could pay off.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.