The home improvement industry in North America is dominated by two major players, Home Depot (HD) and Lowe’s (LOW). For investors both Home Depot as well as Lowe’s have been very strong investments in the past, the two stocks returned 870% and 420%, respectively, over the last ten years, vastly outpacing the S&P 500’s total return of 160% over the same time frame.
The U.S. housing market thus looks quite strong right now, which poises well for home improvement retailers, as their sales are driven by both the construction of new homes as well as by renovations and upgrades that happen before or after existing homes are sold.
These tailwinds have fueled Home Depot’s and Lowe’s impressive shareholder returns over the past decade. And, both stocks pay dividends to shareholders, and raise their dividends each year. Home Depot and Lowe’s are both on our list of 674 dividend-paying consumer cyclical stocks.
We will now take a closer look at Home Depot & Lowe’s, the two home improvement retailers found in the Sure Analysis Research Database, which ranks stocks based upon the combination of their dividend yield, earnings-per-share growth potential and valuation changes to compute total returns.
Business Overview
Home Depot is the bigger of these two companies by market capitalization, sales, and profits. Home Depot was founded in 1978, is currently valued at $230 billion, and it is one of the members of the Dow Jones Industrial Average.
Home Depot operates roughly 2,300 stores in the US, Canada and Mexico, and has revenue of more than $100 billion annually. Home Depot’s store count has grown only marginally over the last couple of years, as the company is focused on driving sales at existing locations, which is a positive for the company’s margins.
Home Depot’s most recent quarterly results were announced on May 15, the company reported revenues that grew 4.4% to $25 billion (primarily driven by a 4.2% comps growth rate) and earnings per share of $2.08, a 25% increase year over year.
Source: Home Depot Investor Presentation
Guidance for 2018 is very positive, as Home Depot forecasts $9.31 in earnings per share (a 28% increase versus 2017) and sees comps growth accelerating to 5.0% throughout the year.
Lowe’s is significantly smaller than Home Depot by market capitalization ($81 billion), but not too far behind with in terms of sales, as the company reported $70 billion in revenues over the last year. Lowe’s was founded in 1946 and operates about 2,400 stores, but average sales at its locations are lower than those at Home Depot. Lowe’s customers primarily consist of retail customers (70% of sales), whereas pro customers make up only 30% of total sales. Home Depot, which is more geared towards pro customers, has been generating a higher pace of comps sales growth.
Source: Lowe’s Investor Presentation
Lowe’s most recent quarterly results were announced on May 20, the company reported revenues of $17.4 billion (up 3% year over year), comp sales came in at only +0.6% though, the rest of the revenue increase was based on new store openings. With a lower revenue growth rate, and more of that revenue growth coming from new store openings (which is less beneficial for margin growth than comps sales increases), it is not surprising that Lowe’s earnings per share growth (+16% to $1.19 in Q1) came in at a slower pace than that of its rival Home Depot.
Growth Prospects
After the last financial crisis the housing market has been recovering successfully, the Case-Shiller Home Price Index (Composite 20) has hit a new all-time high in early 2018. Other metrics that track the health of the housing market in the US are looking positive as well, new housing permits, for example, have been trending upwards for ten years. The rate of existing home sales is close to a ten-year high, and the median existing-home price hit a record high in May.
