Will America's DIY Craze Continue?
Brenda is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Stocks such as Home Depot (NYSE: HD), Lowes (NYSE: LOW), and the Sherwin-Williams Company (NYSE: SHW) usually are cyclical, with increasing earnings as the weather warms. Adding to this trend in today's economy is a housing boom. But will the trend continue? And are Home Depot, Lowes, and the Sherwin-Williams Company likely to be good short-term plays, or strong long-term blue chips?
Looking at the price-performance curve for Home Depot, I see anything but cyclical behavior.
Here we have steady growth from 2012 through June 2013, with no real dip for wintertime like one would expect. Home Depot is also showing a 64.89% growth rate. The company's financials look strong, with a long term debt-to-equity ratio of 0.7 and good current and quick ratios showing proper management. Gross margins of 34.8 are about where we would expect them to be, given that this is a retail store. However, one possible dark cloud is the PE ratio of 25, showing that the stock may be overvalued. A good strategy would be to wait for a market correction. Home Depot is an overall good play as people remodel more in good economic times, and fix things they would otherwise replace in bad times. Home Depot carries supplies for both.
An alternative and strong competitor to Home Depot is Lowes, a higher end DIY supply store with a loyal following among the middle classes as well as the well-to-do. Lowes is preferred among the Foolish, carrying a CAPS rating of 4 against Home Depot's humble 3. Why is this? Lowes has aggressively reduced operating expenses in the last few years, while experiencing record revenues. Lowe's stock price has also seen a 60.7% increase from 2012 to 2013, which is pretty close to the number seen by Home Depot. Its ratios and margins are quite similar to those of Home Depot, but the capital expenditures were reduced by over 20% from 2012. The PE ratio here is marginally better at 24.1, but I believe the same wait for a dip strategy applies to Lowes.
One of the simplest and most common DIY projects is painting, and painting is Sherwin-Williams's business. The one year change on this stock's price is 50%--not quite as strong as Home Depot or Lowes but still quite respectable. But the price tag here is very high: the stock is trading at $187.30, which is 37.1 times its free cash flow. The PE ratio of 30.6 paints a picture of an overvalued stock. Although other financials are strong and people are likely to continue painting things now and in the future, I would wait for a major market correction to pick up Sherwin-Willams.
DIY is here to stay
In answer to the title question, I believe this trend is here for at least the next five years. It is buttressed by the recent disasters in Oklahoma and Hurricane Sandy. Rebuilding is necessary, and will not be quick. DIYers will continue to flourish and are a fundamental part of American culture.
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
Brenda Johnson 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!