The Power of Home Depot vs. Lowe's

By McLain Faett - February 26, 2013 | Tickers: HD, LOW | 0 Comments

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Home Depot (NYSE: HD) recently reported strong fourth quarter earnings of $0.67 per share, up from $0.50 a year ago.  This good news, along with the announced stock buyback program and dividend hike, is definitely something to make investors cheerful.  The main reason Home Depot, the world’s largest home improvement retailer, increased sales during the previous quarter was because of the devastating effects of Hurricane Sandy in the northeast.  Also, improvement to its operating margin due to an increase in transactions and larger purchases led to increased profit.  This gives investors some relief after hearing that Home Depot chose to take a $160 million charge after shutting down all of its seven unsuccessful stores in China, where it was hoping to expand.  So considering this news, and in light of the shutdown of expansion in China, is Home Depot still a strong buy?  And if so, how does it compare to Lowe’s  (NYSE: LOW), its biggest competitor?

Home Depot is a do-it-yourself and do-it-for-me home improvement retailer that serves customers ranging from homeowners to independent contractors and small businesses.  This sector is evidently closely tied to the housing and construction market, and took a large hit during the housing slump during the 2008-2009 recession.   Since then share prices have doubled to all-time highs, with many bulls claiming Home Depot shows no signs of slowing down.  I am slightly more pessimistic in my evaluation of Home Depot's future.  It will become progressively more difficult for Home Depot to continue to increase same-store growth in already saturated markets, which is the reason the company was able to report increased earnings during the fourth quarter.

If, on the other-hand, you believe that the housing market still has a lot more recovering to do, then Home Depot is certainly the better choice to invest in compared to its largest competitor Lowe’s.  Home Depot is a substantially larger company, with 500 more stores than Lowe’s that takes in nearly $73 billion in revenue, compared to Lowe’s $51 billion.  Because Home Depot is so much larger, it has a more efficient infrastructure in place, and its operating margin is 10.26% in comparison to Lowe’s 7.26%.  Furthermore, Home Depot’s profit margin is one of the highest in the industry at 5.91%, compared to Lowe’s middling 3.9%.  The past five years performance is proof of this fact, with Home Depot rising 150% in comparison to Lowe’s rising 50% over the same time period.

Home Depot currently appears to be a strong company in a position to continue increasing earnings over the next few years.  Investors should just be cautious of another potentially harmful housing market, which could be devastating to the home-improvement market.

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