Home Depot vs. Lowe’s: Which Is A Better Bet In The Current Environment?

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Home improvement stocks have been particularly negatively impacted by the ongoing crisis, as consumers under lockdown-style conditions could likely forego home-improvement projects and focus on buying necessities such as food and medicine. Home Depot (NYSE: HD) stock is down by ~18% since early February, while its rival Lowe’s (NYSE: LOW) has declined 26% over the same period, which compares to a 20% decline in the S&P 500 during the same period. Both Home Depot and Lowe’s stocks are struggling from the economic fallout from the pandemic. This is despite performing better (of late) than most discretionary retailers due to emergency spending on certain products (masks, refrigerators, etc). While the outlook for both companies looks stable, as both the companies have seen more or less similar growth over the past few years, we believe Home Depot could be a better bet in the current environment.

Home Depot has seen average revenue growth of 7% compared to 6% for Lowe’s between 2014 and 2019. The average annualized adjusted EPS growth for Home Depot was much higher at 18% compared to 2% for Lowe’s. Though Lowe’s relative valuation is higher than Home Depot with its P/E multiple standing at 22x vs. 14x.

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View our complete dashboard analysis Is Home Depot Expensive Or Cheap After A -18% Move Vs. -26% Move For Lowe’s for more details on how Home Depot and Lowe’s stock fared through the coronavirus crisis, their relative valuations, as well as their financial performance over the last few years. Parts of this analysis are summarized below.

CORONAVIRUS CRISIS: Since early February Home Depot stock has moved -17.6% compared to -26% for the Lowe’s.

  • Home Depot’s stock has declined by about 18% since early February, compared to a 26% decline for Lowe’s, after the WHO declared a global health emergency relating to Coronavirus.
  • Home Depot’s stock declined 18%, while Lowe’s stock is also down 18% since March 8th, as U.S. cases accelerated.

HISTORICAL PERFORMANCE: From 2009-2019 Home Depot stock has grown at 1.7x the rate of Lowe’s

  • Home Depot stock went from $22.58 at the end of 2009 to $216.93 at the end of 2019, representing a change of 860.7%.
  • During the same time period, Lowe’s went from $19.31 to $119.22 representing a change of 517.4%.
  • This implies that Home Depot stock grew at 1.7x the rate of Lowe’s

ANALYSIS:

How do valuations for Home Depot and Lowe’s compare, based on the review of fundamentals?

  • P/E Ratio: Based on trailing 2019 P/E ratios, HD stock looks comparable to prior years and attractive compared to Lowe’s.
  • Home Depot’s current P/E multiple (based on 2019 results) stands at about 14x, compared to about 22x for Lowe’s.

Historical Revenue and EPS Growth: Home Depot grew faster as compared to Lowe’s

  • Home Depot 2014-19 annualized revenue growth of 6.5% is 1.1x that of the 2014-19 Lowe’s annualized revenue growth rate of 5.7%.
  • Home Depot 2014-19 annualized EPS growth of 17.8% is 9.4x that of the 2014-19 Lowe’s annualized EPS growth rate of 1.9%.

Conclusion

Based on historical performance, Home Depot appears to be more attractive compared to Lowe’s in the current crisis. Home Depot could see a larger upside if the health crisis abates, considering its revenue and EPS growth has been higher than Lowe’s. Both companies have enough cash from operations to manage their near term interest expenses. Home Depot’s P/E ratio is lower compared to that of Lowe’s.

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