The decline in housing prices over the past few years has had an impact on a number of different sectors. The weakness in construction and retail stocks are talked about on a daily basis. There is however another sector that has experienced a major decline since home values have plummeted, and that is the home improvement area. Home improvement stocks have suffered as consumers have reduced their spending and trips to these stores. As a result, Lowe’s (LOW) and Home Depot (HD) have seen little growth in their stock prices; they appear stuck in a trading range.
Analysts have been writing off this sector as a number of major investment houses have cut their outlook for the industry. Goldman Sachs and JP Morgan Chase have both cut their ratings on the home improvement sector recently. These brokerages may be missing out on one aspect that the two largest companies in the space are offering: Both Home Depot and Lowe’s are moving into the range of good income plays.
The largest homebuilder in the world, Home Depot is quietly becoming a decent dividend play as well with a 2.9% yield and its $1.00 dividend. Home Depot has been able to do a much better job than Lowe’s at handling the economic downturn. The company has been able to increase profitability despite facing no top line growth in revenue. Home Depot recently upped its earnings estimates for the full year to $2.24 pr share. This is a clear sign of the impressive job that management is doing of cost management at its store.
Management has also done an effective job at improving margins. Gross margins were up 80 basis points improving to 8.5%. Sales were up 2.5% and same store sales were down 0.6%.. Those are good numbers in an incredibly challenging retail environment.
Unlike Home Depot, Lowe’s blamed its poor results on every single area of the economy. Lowe’s saw a 1.6% decline in total sales and a drop in same store sales of 3.3%. Lowe’s blamed its meek sales number on lower home prices, high unemployment, and rising oil prices. While these factors did contribute to its operating performance, the company will have to learn how to deal with these issues going forward. The problem is that Lowe’s is forecasting strong results in sales next quarter as analysts are looking for 4% overall sales growth and 2% same store sale growth.
Lowe’s (LOW) did have some good news, with the company recently increasing its dividend 21% to 56 cents per share. The stock is currently yielding 2.4% and looking more and more like a decent dividend play.
Based on the recent earnings reports I have much more confidence in buying Home Depot’s stock than Lowe’s right now. Home Depot appears to have found the right formula for producing positive results in a weak housing market. Lowe’s will likely miss its projected targets next quarter thus giving investors a better opportunity to buy shares at a lower price point.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.