Both The Home Depot, Inc. (HD) and Lowe's Companies, Inc. (LOW) had announced a new plan for buyback/share repurchase recently. In this article, both stocks will be analyzed fundamentally and technically. Investing strategies will also be reviewed.
The Home Depot, Inc.
HD was up 0.74% and closed at $68.06 on February 27, 2013. HD had been trading in the range of $46.12-$68.28 in the past 52 weeks. HD has a market cap of $101.76B with a low beta of 0.88.
On February 26, 2013, HD reported Q4 adjusted EPS of $0.67, beating analysts' estimate of $0.64. Revenue of $18.2B was higher than the consensus estimate of $17.66B. HD boosted its dividend 34% to 39 cents, yielding about 2.4 percent currently. HD also approved a new $17B buyback plan, replacing the current one that was in force.
On February 27, 2013, Deutsche Bank upgraded HD to Hold with a price target of $70.00. On February 22, 2013, Oppenheimer upgraded HD from Perform to Outperform. Analysts currently have a mean target price of $70.52 and a median target price of $72.00 for HD.
There are a few positive factors for HD:
- Higher operating margin of 10.1% and net margin of 5.9% (vs. the industry average of 8.2% and 4.7%)
- Stronger ROE of 24.2 (vs. the average of 15.6)
- HD generates an operating cash flow of $6.34B with a levered free cash flow of $4.80B
- HD offers an annual dividend yield of 1.70%
Technically, the MACD (12, 26, 9) indicator is showing a bearish trend, but the MACD difference continues to converge. The momentum indicator, RSI (14), is picking up and indicating a bullish lean at 58.45. HD is currently trading above its 50-day MA of $64.88 and 200-day MA of $58.19. The next resistance is $69.25, the R1 pivot point, followed by $71.59, the R2 pivot point, as seen from the chart below.
How to Invest
For bullish investors, a credit put option spread of May 18, 2013 $60/$62.5 put can be reviewed to gain some upside credit premium or to acquire the stock at a price below $62.50 with limited downside risk. Investors can also review the following ETFs (with top 4 weighting) to gain exposure to HD:
- Market Vectors Retail ETF (RTH), 8.86% weighting
- Consumer Discretionary Select Sector SPDR (XLY), 6.44% weighting
- Dow Jones U.S. Consumer Index Fund (IYC), 4.85% weighting
- Consumer Discretion ETF (VCR), 4.83% weighting
Lowe's Companies, Inc.
LOW was up 3.06% and closed at $37.71 on February 27, 2013. LOW had been trading in the range of $24.76-$39.98 in the past 52 weeks. LOW has a market cap of $42.41B with a beta of 1.13.
On February 25, 2013, LOW had authorized the repurchase of up to $5B of the company's common stock. As reported,
The remaining prior authorization was simultaneously terminated. Although this new repurchase authorization has no expiration date, the company expects to use the full amount over the next two years. The repurchases will be subject to market conditions and will be made from time to time either in the open market or through off market private transactions in accordance with the requirements of the Securities and Exchange Commission. The company's repurchase program may be suspended, discontinued or resumed at any time.
Analysts currently have a mean target price of $39.86 and a median target price of $41.00 for LOW.
There are a few positive factors for LOW:
- Higher revenue growth (3-year average) of 1.4 (vs. the industry average of -1.0)
- Lower P/E, P/B, and P/S of 21.7, 2.9, and 0.8 (vs. the industry average of 23.0, 4.5, and 1.1)
- Lower Forward P/E of 13.4 (vs. the S&P 500's average of 14.0)
- LOW generates an operating cash flow of $3.76B with a levered free cash flow of $2.39B
- LOW offers an annual dividend yield of 1.70%
Technically, the MACD (12, 26, 9) indicator has been showing a bearish trend, but the MACD difference converged in the last trading day. RSI (14) is picking up and is near neutral at 49.35. LOW is currently trading above its 50-day MA of $36.92 and 200-day MA of $31.11. However, it is important to see if LOW can hold above its 50-ay MA to determine its short-term direction. The next resistance is $40.21, the R1 pivot point, followed by $42.22, the R2 pivot point, as seen from the chart below.
How to Invest
For bullish investors, it is important to monitor if LOW can sustain above its 50-day MA. Conservative investors can wait for the MACD/RSI (14) to turn bullish before establishing the long positions. Investors can also review the following ETFs (with top 4 weighting) to gain exposure to LOW:
- Morningstar Wide Moat Focus ETN (WMW), 6.25% weighting
- Market Vectors Retail ETF , 5.14% weighting
- Dynamic Build & Construction (PKB), 4.67% weighting
- Concentrated Large Cap Value Strategy Fund (GVT), 3.52% weighting
Note: All prices are quoted from the closing of February 27, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.