Both Home depot (HD) and Lowe’s (LOW) reported last week and the news was better than expected for Lowe’s and worse for Home Depot.
Lowe’s (LOW) reported net earnings of $938 million for the quarter ended August 1, 2008, a 7.9 percent decline from the same period a year ago. Diluted earnings per share declined 4.5 percent to $0.64 from $0.67 in the second quarter of 2007. For the six months ended August 1, 2008, net earnings declined 12.1 percent to $1.54 billion while diluted earnings per share declined 8.7 percent to $1.05.
Sales for the quarter increased 2.4 percent to $14.5 billion, up from $14.2 billion in the second quarter of 2007. For the six months ended August 1, 2008, sales increased 0.7 percent to $26.5 billion. Comparable store sales for the second quarter declined 5.3 percent and declined 6.7 percent in the first half of 2008.
“Our sales results for the quarter, while better than our forecast, reflect the realities of the continuing macro economic pressures on our industry,” commented Robert A. Niblock, Lowe’s chairman and CEO.
Home Depot reported fiscal 2008 second quarter consolidated net earnings of $1.2 billion, or $0.71 per diluted share, compared with $1.6 billion, or $0.81 per diluted share, in the same period in fiscal 2007. Earnings per diluted share from continuing operations in the second quarter of fiscal 2008 were $0.71, compared to $0.77 per diluted share in the second quarter of fiscal 2007, a decrease of 7.8 percent.
Sales for the second quarter totaled $21.0 billion, a 5.4 percent decrease from the second quarter of fiscal 2007, reflecting negative comparable store sales of 7.9 percent, offset in part by sales from new stores.
“We continue to see pressure on our market and the consumer, generally,” said Frank Blake, chairman & CEO. “Despite the macroeconomic conditions, we saw improved execution in our merchandising and operations initiatives during the past quarter. I am very proud of what our associates have accomplished in a difficult environment,” said Blake.
Neither report ought to have investors optimistic although I guess they are less despondent than they were same time last year when comps were dropping double digits.
Is it time to get into either? Do they offer a compelling value proposition at these levels?
I think it is safe to say that housing will lag well into if not past 2009 before it bottoms and turns. The CEO’s of both Toll Brothers (TOLL) and Hovnanian (HOV) feel this way which probably means past 2009 since one would expect both to be on the optimistic side. If that is true, then there ought to be no hurry to purchase shares of either Lowe’s or Home Depot since this means at best their results will stagnate and most likely continue to decline.
Should housing continue its unabated decline, a very possible scenario, then one ought to expect considerably more downside to results and shares prices.
If you are of the “2009 bottom” crowd and want to get in now, who to pick? Home Depot is considerably larger but Lowe’s is the better run company. During the current downturn Lowe’s has been steadily picking up market shares at Home Depot’s expense, has a better net profit margin, operating margin, EBITD margin and return on average assets.
Home Depot advocate will argue its scale, higher dividend and “potential” make it a better value investment than Lowe’s.
All that is true but here is the thing. Management and the Board haven’t done anything to instill confidence in investors that they have the ability to unlock that potential. That, if true, makes Home Depot a classic value trap, a company that through every stock screen and analysis ought to be the better investment based on the numbers but due to management, never succeeds at realizing those expected results.
It is kind of like having a car race in which two racers, one in a Mustang and the other in a Prius face off. By every measure the Mustang ought to win but if its driver cannot manage a manual transmission, the Prius will win the race. Thus is the Home Depot dilemma.
Before I would be willing to wager a penny on the company, they need to show some type of direction. From the selling of the supply division (most of it anyway), the ill conceived stock repurchase plan, still bloated management and only now slowing capex plans one would have a hard time arguing Blake & Co. are on top of the situation.
When you contrast those event with the steady, almost uninteresting progress executing a well designed plan at Lowe’s, the “which one to buy” argument becomes clearer.
I am in the “past 2009 housing bottom” camp now and would avoid both, but, if you disagree, Lowe’s seems to be the better choice.
Disclosure (“none” means no position):None
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