Improve Your Portfolio With Home Improvement

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

Not all home improvement retail companies are created equal.  Similar to how other sectors in the market exist, you can’t quite loop all the stocks in a given group as the same.  Each company has its own strengths and weaknesses, its particular branding, and different futures.  In this article, I will discuss two very popular stocks in this sector and one that may not be as familiar to investors.

Home Depot

Home Depot (NYSE: HD) is currently the largest home improvement retailer in the United States with annual revenues soaring past the $70 billion mark this past year and earnings-per-share (EPS) breaking the $1 mark this past quarter for the first time in years.  The stock price has hit multi-year highs not seen since the year 2000 bubble time span.  However, things are a lot different now and I see Home Depot potentially steadily going higher over the course of the next decade.

Home Depot has largely been a big-box store which is defined as having a physically large retail establishment chain unique to the branding of the company.  Recently some big-box stores like Best Buy have seen their stores take a hit by online establishments making the investment to even have a big-box store look like a huge negative.  However, Home Depot has been mostly immune to the threat of online.  Sure you can buy some tools and accessories online but some of the bigger items you can’t quite find.  Even if you do find them online, good luck paying for the shipping.  To build houses you need heavy building materials like piping, wood, bricks, and/or drywall – and lots of all of these.  No one orders a house through Amazon – at least not yet.

In the last earnings report Home Depot released, they highlighted the fact that their inventory turnover ratio was 4.7 times at the end of the second quarter of fiscal 2012 compared to 4.4 times at the end of the same quarter in 2011.  Net sales also increased 1.7% in the second quarter year-over-year.  In my interpretation, Home Depot is on the rise and even though they are still adding stores throughout the United States and its territories, Canada, China, and Mexico, there is still a lot more markets they can penetrate around the world.

The next earnings announcement is set for November 13, 2012.

<img src="" />

HD Total Return Price data by YCharts


Lowe’s (NYSE: LOW) is currently 2nd to Home Depot in the home improvement retail sector even though it was founded over 30 years before Home Depot (1946 vs. 1978).  Lowe’s has over 1700 (vs. Home Depot’s 2200+) stores around the United States, Canada, and Mexico.  It hasn’t reached the level of Home Depot’s presence in locations either location-wise or quantity-wise, and in recent years, the stock has not seen the same growth.

In the past 5 years, Lowe’s has increased in share price, not including dividends, just 7.7% while Home Depot has gone up over 90% in the same time frame.  While economists and accountants and earning statement gurus might try to add up the percentages and calculate the problems with math and trends, I can give my own analysis and reasoning based on my recent experiences with both stores.

I recently moved locations across states about a month ago and needed some supplies for various things and had both stores the same distance away from my old house.  The first thing I noticed that was different between both stores is the customer service.  I remember looking for something basic at Lowe’s and standing in the aisle and then walking to other aisles looking for someone to help me.  After over 10 minutes, I was finally helped on only to be told I should ask someone else.  I later left because it was obvious the people I had asked for help had no clue of where anything was in the store. 

At Home Depot, the opposite occurred and I found what I needed quickly.  On another occasion I was looking for something that was in the weekly ad but I never told the associate at Home Depot.  I just said I was looking around in the section where I might find that item (a power drill).  The employee, before he left me alone, mentioned where the sale was in the store (near the front cashier stands) and I was pretty surprised.  It is the small things like this, the employee’s having awareness of what is on sale for a given week, and the customer service that people will remember and tell their friends about.

Lowe’s recent earnings statement missed EPS expectations by over 7%.  Next quarter earnings are estimated to fall further.  It appears that Lowe’s may be at the fork in the road and they will need to decide if their new everyday value pricing campaign is hurting them financially and if their lack of equal customer service to Home Depot is a virus to the company's brand long-term.

The next earnings announcement is set for November 19, 2012.

<img src="" />

LOW Total Return Price data by YCharts

Lumber Liquidators

A company with a superior story stock-wise than either Home Depot or Lowe’s is Lumber Liquidators (NYSE: LL).  In the past 5 years, since going through their IPO in late 2007, the share price has soared over 425% and I believe it has a lot more room to grow with a market cap of only $1.4 billion.  With fewer than 1300 full-time employees, Lumber Liquidators might seem minuscule in the conversation with the big retailers already mentioned in this article, but I think this makes the company and stock more attractive as an investment.

Founded in 1994, Lumber Liquidators specializes in wood flooring at very reasonable prices.  They offer the majority of their products under their private label brands which means more money on their own bottom line.  Their lack of huge big-box locations and instead focus on integrated sales channels and online catalog makes overhead less of a burden compared to the competition.  For several years they were a huge sponsor on the Professional Bowling Association (PBA) Tour and even had the tour named after them.  This helped make them a household name since the finals are shown on ESPN and quite a few people watch ESPN.  Even if they didn’t see the actual bowling, they caught sight of the commercials.

The EPS has multiplied over three times the past 5 years from $0.12 at the end of 2007 to $0.43 as of June 30, 2012 earnings report.  Net sales for the second quarter of 2012 increased $34.9 million (19.9%) over the same quarter in 2011.  The average sale in the second quarter also increased 6.3% over the same quarter in 2011 to $1625.  It is clear people are buying more wood and choosing to floor their homes with wood over other materials. 

It is possible that this trend can be traced to the gradual movement of people choosing to live in warmer climates where wood may be more beneficial.  Wood flooring is generally safe and clean and doesn’t build up with allergens that irritate people susceptible to them.  Although wood flooring costs more initially, there is far less maintenance.  Aesthetically, hardwood floors that are taken care of are usually superior to that of carpeted floors.  Overall, home owners may just be choosing hardwood flooring to improve the value of their homes in an economy of falling home prices.

In the past two quarters, Lumber Liquidators has surprised analysts to the upside with 16% and 48.3% surprises for 1st and 2nd quarters of 2012, respectively.  The current average EPS for the next earnings statement coming up is set for $0.34.  Their most recent quarter was $0.43 so a surprise to the upside is definitely doable unless people start being allergic to wood. 

The next earnings announcement is set for October 22, 2012.

<img src="" />

LL Total Return Price data by YCharts

mikecart1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Lumber Liquidators. Motley Fool newsletter services recommend Lumber Liquidators and 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.

blog comments powered by Disqus