Which of These 3 Companies Is Best Positioned to Profit From Housing?
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Improved prospects in the housing sector isn't good news for just companies in home sales and housing starts, it also means a slew of profits for The Home Depot (NYSE: HD), Lowe's (NYSE: LOW), and Sherwin-Williams (NYSE: SHW).
The firms were hammered down during the recession, but are picking up along with the increase in the number of housing starts. It should be noted that while housing starts fell in April (the most recent numbers), the figures were likely just a blip, and major profits are ahead. But which renovation company is ready to make the most profits?
An argument for Home Depot
While the rise in share price has been relatively steep for Home Depot in the last year, the company is the world's number one home improvement retailer and could benefit the most from the housing recovery. The top rating is an achievement that no other in the industry can boast, and it is because of sound business practices that the company was able to rapidly establish that position. That means the firm could be in the best position to make intelligent managerial decisions to capture the growing renovation market.
The brand, and its stores, are spreading like wildfire, and I suspect that if the recession hadn't hit, the company would already be priced well over $100 per share. In May, the company reported net earnings growth in the first quarter of 18.5%, compared to the same period last year. Net sales increased 7.4% year-over-year. Company executives anticipate a 17% earnings per share growth at the end of this year, which is an indication that Home Depot representatives also consider April's housing data to be an anomaly.
An argument against Lowe's
While investors would have been better off getting in on these stocks earlier, they now have the advantage to see which company is set to profit the most. Lowe's first-quarter report wasn't nearly as attractive as Home Depot's, and the lack of profits could be a sign of where people are going for their renovation projects. In fact, while Home Depot experienced soaring revenue, Lowe's was down 0.5% from the same period last year. The company was over $300 million off of the analysts' consensus estimate.
Even though net earnings were $540 million, an increase of 2.5% from last year, revenue is the major indicator right now. With so many more people looking to renovate, it is the company's ability to attract people to its store over the competition that will determine the victor. Furthermore, with many renovators looking to improve their homes right now, the months and years ahead could decide the long-term future of these companies as they try to build customer loyalty.
Customer experience at Home Depot, which prides itself on a knowledgeable staff which can help individuals with their projects, has been positive over the years and has led the company to massive growth. The business has retained its clients from past years and that is the likely reason for decreased sales at Lowe's, even during this housing recovery.
An argument for Sherwin-Williams
Home prices are near their pre-recession levels, and this has caused companies like Fortune Brands Home Security to rise by over 75%. Similarly, Sherwin-Williams, which accrues revenue from residential and commercial renovation projects, increased in price from around $75, in 2011, to over $180 today. Even though the share price has experienced substantial growth since 2011, it has only risen 35% since 2010.
Homeowners who had put off costly renovations during the recession will now turn to companies such as Sherwin-Williams to complete their projects. While those looking to renovate have several options for materials suppliers, Sherwin-Williams has showed a sign of confidence recently by increasing its dividend by 7%. Still, my money would be on Home Depot because of its customer service and many locations.
Playing the momentum
Investing in these companies would be a momentum play, one that is relatively risky due to the potential for investors to be overly optimistic. However, while prices may dip, and they have since the release of April's data last month, betting on the full recovery of the housing sector is a smart long-term play. Count on Home Depot to come out on top.
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Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends Home Depot, Lowe's, and Sherwin-Williams. 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!