Home Depot / Lowe's Earnings Previews: Both Retailers Fairly-Valued In A Heavy Housing Market

Aug.17.14 | About: Home Depot, (HD)


DIY Home Improvement will lag with Housing.

Both HD and LOW are close to fairly valued, with a slight edge to LOW.

Home Depot less susceptible to shocks; If only LOW could expand operating margin.

Both Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) report their fiscal 2nd quarter, 2014 earnings this coming week.

Home Depot reports their fiscal q2 '14 results before the opening bell on Tuesday, August 19th, 2014. Consensus analyst expectations are looking for $1.45 in earnings per share (EPS) on $23.62 billion in revenue for expected year-over-year growth of 17% and 5%.

Analyst consensus has risen slightly for revenue over the last 3 months, while EPS has remained stable.

In fiscal q1 '14, reported in May '14, HD revenues rose 3%, operating income rose 9% and EPS rose +20%. HD management maintained comp guidance of between 4% - 5%, for 2015, and called May sales "robust."

Big-ticket comp's which are thought to be roughly 20% of HD revenues (tickets of $900 or more) rose 2.5% in the quarter.

LOW reports their 2nd fiscal quarter of 2014 on Wednesday, August 20th, 2014.

Analyst consensus is expecting $1.02 in EPS on $16.55 billion for expected year-over-year growth of 16% and 5%. Revenue consensus has drifted slightly higher over the last 3 months for LOW's revenues, while consensus EPS is a penny lower.

Last quarter, LOW grew revenues 2%, operating income 9% and EPS +18%. LOW guided to calendar '14 comps of 4% slightly lower than HD's guidance.

Weather impacted the fiscal first quarters of both HD and LOW in the February, March, April periods, so investors should probably expect somewhat of a pull in from the tougher first quarter.

Valuation metrics:

Home Depot vs. Lowe's - valuation metrics comparison

Home Depot Lowe's
Market cap (8/15/14) $114.5 bl $50 bl
fy '14 rev gro 5% 4%
fy '14 EPS gro 17% 21%
fy '15 rev grow 4% 4%
fy '15 EPS gro 16% 20%
fy 2014 comp guide 4% - 5% 4%
fy 2013 gross mgn 34.78% 34.60%
fy 2013 operating mgn 11.52% 7.57%
fy 2013 net mgn 6.76% 4.1%
2014 p.e 18(x) 17(x)
2015 p.e 15(x) 14(x)
3-yr rev growth avg (est) 4% 4%
3-yr EPS growth avg (est) 16% 19%
Price to cash-flow 17(x) 11(x)
Price to free-cash-flow (FCF) 14(x) 14(x)
Free-cash-flow yield 6% 7%
% of FCF retnd to shareholder 159% 136%
Div as % of FCF 33% 26%
Div yield 2.10% 1.60%
Dividend payout ratio 44% 37%
Debt to capital - current 35% 47%
Debt to capital - 3 years ago 25% 30%
Intrinsic value est - Trinity $92 $57
Intrinsic value est - Morningstar $80 $49
Discount to intrinsic value - est 7% 6%
Click to enlarge

* Source: internal spreadsheet, Thomson Reuters consensus estimates;

* explanation: because the majority of retailers' fiscal years end in January or February each year, the fiscal year typically occurs when the year ends. Because the bulk of the sales and earnings typically occur in the calendar year prior, some retailers have changed their fiscal years to match the calendar years. HD and LOW are in their fiscal 2014 years because the majority of the sales and earnings occur in calendar year 2014.

The big metrics that jump out are HD's market cap relative to LOW's, and HD's operating margin relative to LOW's.

The one metric we didn't put up was fully diluted shares outstanding: HD's has shrunk from April, 2006's 2,122 million fully diluted share outstanding to May '14's 1,376 million or a 35% reduction in shares outstanding.

For LOW, for the same period, fully diluted shares outstanding have shrunk from 1,590 to today's 1,017 or a 36% reduction in shares outstanding.

Where I think HD might have the edge and where it shows up in the operating margin, is HD's Pro business, which results in a bigger ticket comp for HD, and better SG&A leverage.

Both companies are returning all of their free-cash-flow and then some to shareholders and have done it the last few years by issuing long-term debt. (Note the debt as percentage of total capital percentages.)

In my opinion, both stocks are pretty fairly valued, and with housing numbers slowing, it could be tough for either company to see P/E expansion in the near future.

Both companies have managed to convert mid-single-digit revenue growth into low-double-digit operating income growth, and high teens EPS growth, thanks to SG&A leverage, and share repos.

Between the two, at today's prices, I'd give LOW the slight edge given more room on the dividend, and the lower cash-flow valuation, but for both companies we're in the 7th inning of a 9-inning ball game.

Both companies have been stuck in a trading range since Taper started in the Spring of 2013.

Investors can own both or neither right here, but you'll need patience.

Disclosure: The author is long HD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.