Value Faceoff: Home Depot vs. Lowe’s

With the recent liquidity crisis in the subprime market, the formerly red hot housing sector has finally started to cool off. Home equity loans are costing significantly more now and future home price appreciation expectations are finally getting back to reality. These factors have caused investors and shoppers to curtail their demand for home improvement retailers.

Home Depot (HD) and Lowe’s (LOW) dominate the home improvement retail sector. Both of these stocks are trading close to their 52-week lows. Interest in these stocks started to pick up on Value Investing News, so I started a poll on September 26th to find out which of these leading home improvement stocks provides a better value. Here are the results:

Home Depot versus Lowe’s

Two-thirds of the value investors that took this poll found Lowe’s to be a better value. Surprisingly, only 9 out of the 27 poll takers thought Home Depot’s stock provided a better value.

I actually voted for Home Depot even though I really don’t like Home Depot as a consumer.  Home Depot has a lower P/E, P/B, and P/S ratio than Lowe’s.  I compared those ratios and more in the table below:

HD vs. LOW Ratio Analysis
Home Depot Lowe’s
P/E 13.0 14.4
P/B 2.4 2.7
P/S 0.8 0.9
Dividend Yield 2.7% 0.8%
YOY Revenue Growth -14.8% 5.8%
YOY EPS Growth 45.3% 39.6
Gross Margin 32.7% 34.8%
Operating Margin 9.7% 10.7%
ROA 8.88% 10.41%
ROE 18.58% 19.33%
ROIC 13.0% 15.2%
Financial Leverage 2.09 1.86
Debt/Equity 0.43 0.27

Looking at these key ratio, it is still too close call which of these two home improvement retailer stocks is a better value. On the one hand, Home Depot is cheaper relative to its current revenue and earnings, and it has a much more generous dividend yield.  Lowe’s has better margins, growth rates, and lower debt.  Either way, I’d still like to see both of these stocks get cheaper before investing.

Full Disclosure: I do not own shares of Home Depot or Lowe’s.

Looking at these ratios, which of these two stocks is the better value and why?  Share your thoughts in the comments section below.

3 thoughts on “Value Faceoff: Home Depot vs. Lowe’s

  • October 18, 2007 at 12:59 am

    Home depot is a better value. It may have a PE of 13, which is on depressed eps expectations due home building their sale of wholesale business. I imagine that in a year or two the company will be growing nicely again. I don’t care about next years or the year after earnings, I care about the next 20 years since a stock’s value reflects the long-run (or should) Taking a more normalized forward eps suggests the P/E is much lower. My DCF calcs show HD is undervalued.

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