Home Depot: Buy, Sell Or Hold

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 |  About: Home Depot, Inc. (HD), Includes: LOW
by: BubbleBustInvesting

Investors long on the Home Depot (NYSE:HD) stock have plenty of things to celebrate this morning. A strong earnings report, a bullish guidance, a higher dividend, and a sizable buyback program! But with the stock up close to 40 percent for the year, the question is whether Mr. Market has fully discounted all the good news. Isn't Lowe's (NYSE:LOW) a better choice than Home Depot?

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The answer the first question is not quite so. The company's market value of roughly $100 billion is still below the enterprise value of $103.83.

The answer to the second question is no. While Lowe's enjoys a lower valuation, it lacks a number of advantages Home Depot's advantages:

First-Mover Advantage. A pioneer in the home improvement area, Home Depot occupies prime locations that offer customer convenience.

Scale: Home Depot is 1.5 times larger than Lowe's with $71.38 billion in revenues versus $51.8 billion, which translates to better operating margins-10.26% percent versus 7.26% of Lowe's.

Efficiency Home Depot utilizes its assets better than Lowe's, as reflected in the return on assets-24.15 percent versus 6.33 %.

Bundling: Home Depot has been a pioneer in bundling products with services, making it easier for customers to find out the materials they need for DIY projects or hire professionals for DIFM projects.

Culture: From its early days, Home Depot has fostered a corporate culture that of the "inverted pyramid, " which puts customers and sales associates first.

Home Depot and Lows Financials

Company

Home Depot

Lowe's

Forward PE

19.33*

17.43**

Operating Margin

10.26%

7.26%

Quarterly Earnings Growth

1.40%

1.90%

Quarterly Revenue Growth

4.60%

76%

Return on Assets

24.15%

6.33

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*January 29, 2014

**February 3, 2014

Source: Yahoo. Finance.com

A word of caution: Homebuilders and building materials suppliers are highly sensitive to an economic slow-down could hurt the sector, especially if it results in a slow-down in employment growth-the most important driver of home demand. Besides, Home Depot's big run up in the past twelve months makes it vulnerable to profit-taking.

The bottom line: Home Depot is a solid play in a rebounding industry that will reward handsomely long-term investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.