Home Depot vs Lowe's One-Year Rematch

Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A year ago, I examined the pairing of Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW) to determine which of the two stocks I thought was the better investment. Today I am revisiting them to evaluate:  1.) how well my prediction worked out and 2.) whether or not I will change my opinion at this time.

A year ago, I suggested that both companies held opportunities for investment, but that Lowe’s offered a greater potential gain. At that time, Home Depot was trading at $50 per share, and Lowe’s at $30. I opined that Home Depot could rise to $60 by year-end 2012, and Lowe’s to $39.

Home Depot actually ended 2012 at $61.51 per share, and trades now at $73 per share. Lowe’s ended 2012 at $35.22 and now trades at $38 per share. My prediction for Home Depot was born out, but I was quite wrong on Lowe’s.

So where do the companies stand now, and how do I feel about their prospects for the next 12 months?

Both Home Depot and Lowe's will be reporting their 1Q 2013 earnings in the next few weeks: Home Depot on Tuesday, May 21 and Lowe's on Wednesday, May 22.

Housing recovery on track

According to a recent Reuters article, the housing recovery is still on track, with March home sales up 18.5% versus a year ago. Housing sales in some markets are being suppressed, actually, due to a lack of inventory. The low supply of houses should actually push up prices in some hot markets. All of this bodes well for the home improvement retailers.

Home Depot

Home Depot is current trading at about $73 per share, just slightly off its 52-week high. This is a 57% increase from its low of last spring, and a 19% increase YTD.

Analyst opinions are good, with a mean of 2.2 ("1" being Strong Buy, "5" representing Sell). Of the 30 analysts covering the stock, nine recommend a Strong Buy, nine a Buy, and 11 a Hold, with one Sell rating. The mean one-year target price for Home Depot is $74.81, only 2% higher than the current price.

The consensus earnings estimate for 1Q13 is $0.76, a 13% increase over 4Q 2012 earnings, and for 2Q 2013 is a 56% increase over 1Q 2013. The FY 2013 consensus is 14% higher than actual FY 2012, and FY 2014 consensus is 16% higher than FY 2013. Its estimated annual growth for the next five years is 14.8%, compared to the five-year forecast for the S&P 500, which is 9.3%.

The PEG ratio of 1.4 indicates that the PE is slightly higher than the earnings growth rate, which means that the price may have gotten slightly ahead of value. With a PE of 20.8, this puts the price of stock at $73.42 for year-end 2013, and at $85.49 for year-end 2014, a 17% potential return by the end of 2014.

Home Depot has been on quite a run over the past 12 months, with a total return of 44% and very few pullbacks.

And Home Depot has recently become the seventh most-shorted stock among Dow Jones stocks, which may indicate increased belief among investors that the stock has run up too much compared to its earnings growth.

This year, Home Depot was upgraded by Oppenheimer from Perform to Outperform, and was downgraded from Buy to Hold by Stifel Nicolaus.

All of these factors combine to suggest that Home Depot may be in for a period of flat prices or even a pullback.

Lowe’s

Lowe's actually has very similar numbers to Home Depot. The stock was recently trading at about $38 per share, off 5% from its 52-week high of $32.29 reached in February and March. This is a 53% increase from last summer's low, and a 6% increase year-to-date. Lowe’s seems to be just a tiny bit behind Home Depot in many aspects.

Analyst opinions are also similar, with a mean of 2.4, with five Strong Buys, eight Buys, 11 Holds, one Under-perform and one Sell. The mean target price is $40.29, which is 7% higher than the current price.

The consensus earnings estimate for 1Q 2013 is $0.51, a 96% increase over 4Q 2012 earnings and 16% higher than a year ago. For 2Q 2013, it is a 51% increase over 1Q 2013. FY 2013 consensus is $2.09, 19% higher than FY 2012, and FY 2014 is 21% higher than FY 2013. Annual growth for the next five years is estimated at 17.5%.

The PEG ratio of 1 indicates that the current share price and PE are exactly inline with the earnings growth rate. Lowe’s has a PE of 18.1, lower than Home Depot's PE, and a growth rate higher than Home Depot’s, which is why the PEG is close to 1.0.

This PE puts the stock price of Lowe's at $37.83 by year-end 2013, and at $45.79 by year-end 2014, a 21% potential return.

Lowe's has also had steady price appreciation, with a total return of 21% over the past year.

Lowe’s has been downgraded by two different analysts in 2013, from Buy to Hold by Stifel Nicolaus and from Hold to Sell by Canaccord Genuity

Conclusion

Both companies are heavily dependent on the continued recovery of the housing market, which looks good in many parts of the country.

I don’t doubt that both companies are great and will continue to reward shareholders in the future. Neither seems to offer much in the way of potential price appreciation for 2013, however, as their stock prices seem to already include 2013 growth.

I think the valuation for Home Depot is high, and I would wait for a pullback to buy. The current PE is 20.8, and Home Depot’s five-year average PE is 18, so I would like to see the PE more inline with its historical average.

Lowe’s current valuation seems more reasonable, at 18.1, and its five-year historical PE average is 17.1. Lowe’s is fairly attractive at this price level.

So at this point, I like Lowe’s better than Home Depot. Which is the same conclusion I came to last year, and which turned out to be wrong. That fact doesn’t make me change my mind, though.


Karin Hernandez has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lowe's. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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