DRIP PORTFOLIO
Home Depot and Lowe's
Both show us the money

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By George Runkle (TMF Runkle)

ATLANTA, GA (Jan. 3, 2000) -- In last week's column, I said that I'd try to contact investor relations at Lowe's (NYSE: LOW). If I didn't succeed, I planned on comparing the finances of Lowe's with Home Depot (NYSE: HD). Unfortunately, I wasn't able to contact Lowe's, so we'll wrap up this series with a comparison of financial information. Hopefully in the future I will get in contact with Lowe's, and I'll cover the conversation in a future column.

When comparing financial information, where is the best place to start? I like to look at the data that's easy to find, so we'll go to the Fool Quotes/Data area and see what's there. First off, let's compare the data under "Financials." What jumps out at us? I notice that sales growth for Home Depot is consistently 4% to 5% higher than Lowe's each year. The gap narrows when we compare earnings per share (EPS).

The next place to look for information is in the "Snapshots" area of Fool Quotes/Data. This has a wealth of data and financial ratios already calculated for us. If we compare "Financial Strength" ratios, I find the Long-Term Debt/Equity and Total Debt/Equity ratios for Lowe's is much higher than Home Depot's. It still isn't very high though -- Long-Term Debt/Equity for Lowe's is only 0.38 vs. 0.06 for Home Depot. Both are respectable. Also, it's important to realize that long-term debt is not a bad thing. It gives the company leverage to increase earnings for the shareholders. Where it is something to worry about is when earnings drop, or when the cost of taking care of that debt interferes with profits.

What else jumps out at us? Look at the "Valuation Ratios." The Price/Earnings ratio, Price/Sales ratio, etc., are much lower for Lowe's than Home Depot. The P/E for Lowe's, at 35.91, is less than half Home Depot's 73.77. The Price/Sales ratio difference is even more extreme -- 4.40 for Home Depot vs. 1.50 for Lowe's.

You can make an argument that this shows Lowe's is undervalued compared to Home Depot. I take the other view, which is that investors have more confidence in Home Depot and are willing to pay more for its stock. "Profitability" is also something to study on the Fool data page. Home Depot beats Lowe's in each of those measures, by about 2% in Gross Margin, over 3% in Operating Margin, and about 1.7% in Profit Margin.

Let's take a look at "Management Effectiveness" of the financials as shown by the Fool data. The Return on Equity is almost 7% higher at Home Depot than at Lowe's. This is a measure of the rate of return on the stockholders' investment, so it is very important to figuring how well a company is handling your money. Since Return on Equity can be inflated by a company taking on debt (Equity = Assets - Liabilities - Preferred Stock), we also want to look at Return on Assets. This is 14.45 for Home Depot vs. 7.83 for Lowe's, so Home Depot is significantly higher again.

Sometimes I kick myself for not studying the company's 10-Q and 10-K forms, which are the reports filed with the SEC. Form 10-Q is filed every quarter, 10-K every year. They contain balance sheets, cash flow statements, and income statements, just like the annual report but without the pretty pictures or hype. We can find them by going back to the Financials area on the Fool, and clicking on "SEC Filings." For Home Depot, the most recent report is the last 10-Q, dated 12/3/99. For Lowe's, it is the 10-Q dated 12/13/99.

The first thing I did was check the "Inventory Turnover" -- that is simply dividing sales by inventory. The number you get is how many times that inventory was turned over in the quarter. Home Depot turned over its inventory 1.9 times in the quarter, Lowe's 1.4 times. If we figure a 90-day quarter, Home Depot turned over its inventory every 48 days, Lowe's every 64 days.

As I study the respective 10-Q's, nothing jumps out at me except that Lowe's has increased its long-term debt, and Home Depot has lowered its long-term debt. However, even at a higher level, Lowe's does not carry a big debt burden. The additional debt can aid in expanding the business, thus increasing earnings. A company can raise money for expansion through its cash flow from operations, sale of stock, or borrowing. Using only cash flow from operations can slow down the expansion, and sale of stock lowers earnings per share. Raising debt can allow faster expansion without diluting sharecount, so it's not necessarily bad.

In conclusion, I feel the numbers favor Home Depot. It has had higher increases in sales, better return on assets, and higher margins. Also, it is able to do so with less debt. Finally, it has a stronger brand name. As you read through this series of columns about Home Depot and Lowe's, was there anything that became obvious to you? Did you think to yourself, "All this guy did was write about a company involved in a business he knows, call investor relations, and check out some financial data that is easy to find."

I hope you thought that, anyway. Everything I did in the past few weeks was very easy, and you can do it yourself to research companies you know. There really is nothing magical about this, as my bosses said in one of their books, You Have More Than You Think. Go out and try it! And if you have questions, just visit us on the message boards linked below.

Drip Portfolio

1/3/00 Closing Numbers
Ticker Company Dly Pr Chg Price
CPBCAMPBELL SOUP-1 7/16$37.25
INTCINTEL CORP11/16$87.00
JNJJOHNSON & JOHNSON-1 1/16$92.19
MELMELLON FINANCIAL CORP-1 7/8$32.19

  Day Week Month Year
To Date
Since
7/28/97
Annualized
Drip .67% .67% .67% .67% 30.78% 11.64%
S&P 500 -.95% -.95% -.95% -.95% 55.01% 19.71%
S&P 500(DA) -.95% -.95% -.95% -.95% 57.63% 20.54%
S&P 500(DCA) n/a n/a n/a n/a 30.37% 11.50%
NASDAQ 1.52% 1.52% 1.52% 1.52% 163.20% 48.76%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/9722.3909INTC44.603$87.0095.05%
11/14/9711.292JNJ80.007$92.1915.22%
11/5/9828.3741MEL34.416$32.19-6.47%
4/13/988.174CPB54.586$37.25-31.76%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/9722.3909INTC$998.70$1,948.01$949.31
11/14/9711.292JNJ$903.44$1,040.98$137.55
11/5/9828.3741MEL$976.51$913.29($63.22)
4/13/988.174CPB$446.18$304.48($141.70)
  Cash: $24.32  
  Total: $4,231.08  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.