KeyStones Stock Talk Podcast Episode 143

This week we have a One-On-One Versus Debate between two heavyweights in home improvement, The Home Depot Inc. (HD: NYSE) and Lowe’s Companies Inc. (LOW: NYSE). Both have produced strong gains year-to-date driven by stay-at-home DIY projects and a great deal of free money sloshing around – we debate which is the better value today. Brennan takes Lowes and Aaron gives you his pitch for Home Depot. I will sit in as judge, jury, and executioner.

#1) Review your individual holdings.  

Look at each equity ETF, fund, and stock and see if you want to continue to own it.

  1. a)Under diversified:holding 2-5 stocks (for example). Too much company-specific risk.
  2. b)Over diversified: Example – owning 7 or 10+ ETFs or funds – likely too high. In our full webinars, we typically recommend a portfolio consisting of 15-25 high-quality growth and dividend growth stocks from a diverse set of sectors.  Use our research to achieve this or find someone else you trust to help you build that portfolio

 High correlation, concentration, or duplicate holdings: Example – owning 4 of the 5 big banks is high correlation and likely unnecessary, or if 10 of the 15 stocks you own are oil & gas related, this is too much concentration in 1 sector.

 

 FOR & AGAINST

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 Lowe’s Companies Inc. (LOW:NYSE)

Current Price: $199.77

Market Cap: $143.2 Billion

 Lowe’s Companies, Inc. is a home improvement company in the United States and Canada with approximately 2,000 home improvement and hardware stores.

 For Case:

  • Lowe’s has been restructuring the company and increasing profitability by closing underperforming stores.
  • Both companies had similar Fiscal 2020 revenue growth of approximately 25%. But Lowe’s 2020 diluted EPS grew 41% for the full year which outperformed Home Depot’s EPS growth by approximately 24%.
  • Lowe’s currently has a higher use of debt on its balance sheet, with a Net Debt-to-EBITDA multiple 1.9x – but I like the company’s use of cheap debt right now.
  • Lowes trades with a PE multiple of 26x which is an 18% premium over its average 6-year P/E multiple of 22x, while Home Depot trades at a premium of 33% compared to its average 6-year P/E multiple.
    1. Plus, Lowes has an EV/EBITDA multiple of 15x whereas Home Depot trades with a multiple of 19x.
    2. So, seeing that Lowe’s trades at more attractive multiples, offers similar revenue growth and better EPS growth, I believe Lowe’s offers better value going forward.

Home Depot Debate

  • Home Depot is the world’s largest home improvement specialty retailer with 2,300 stores across North America.
  • Very strong growth in 2020. Revenue up 25% and earnings per share up 16%.
  • Revenue growth has averaged 9% over the past 3 years.
  • Staple, dividend growth stock. Pays a nice yield of about 2%. The dividend was increased 10% in 2020 and 17% on average over the past 3 years.
  • Analysts are expecting high single-digit average earnings growth over the next 3 years.
  • Price-to-earnings valuation of ~26 times analyst estimates for the current year.
  • Finally, relative to Lowe’s, Home Depot has stronger operating margins (at 14% compared to 11% for Lowes), higher return on assets (at 21% compared to 16% for Lowes), and acquired a greater share of the market in 2020 ($22 billion in additional for Home Depot versus $17.5 billion for Lowes).
 HDLowes
Operating Profit Margin13.8%10.76%
ROA21%16%
Market Revenue Gain$21.9 billion$17.5 billion

 

 

 

 

 



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