Better Housing Play: Home Depot or Lowe's?

Given the housing data announced on Tuesday, it wasn't surprising to see both Home Depot (NYSE: HD  ) and Lowe's (NYSE: LOW  ) jump out of the gate on a positive note. Investors have been waiting for a reason to jump onboard one of these industry stalwarts, and the best housing data seen around these parts in some time gave them the impetus they needed -- at least for a while.

Housing data
Many headlines following Tuesday's housing data was released were fairly optimistic, but as investors and shareholders dug a bit deeper, some found the information positive, but only mutedly so. Bulls focused on the upsides, and there were a few to chew on. The nationwide rise in home prices was the first in seven long, frustrating months for the housing and construction industries. The 1.3% increase in 20 major markets across our great nation brought the average prices back to levels not seen since 2003; that's all great stuff, right?

The flipside of the housing data dropped a bit of rain on this parade. The increase in home prices came after a March that was downright abysmal, so improvement was expected. But even with the slight increase, home prices are still down 1.9% for the year, and a full 34% off the ridiculous market boom highs. Naturally, this additional review of the information brought Home Depot and Lowe's investors back down to earth as Tuesday's trading continued.

But with all the ups and downs in the housing market, one thing is clear for investors: Even the most tepid housing news is likely to boost one, if not both, of these stocks. So what's the best option?

The similarities
At first glance, Home Depot and Lowe's are two peas in a pod. Much of the financial data is eerily similar. Lowe's trades at an earnings multiple of 18.1 compared with Home Depot's 19.7, below the industry average of 24 times earnings. Both companies are solid income producers, too; Home Depot's 2.2% and Lowe's 2.3% are above the industry average and are great in today's low-interest environment.

The amount of debt to equity for each of the retail leaders is also nearly identical; Lowe's sits at 59% and Home Depot 60%. Both have embraced the online revolution, too, offering customers a strong social-media presence. Lowe's even offers a downloadable app that allows smartphone users to shop from wherever they may be. It remains to be seen how many toilets will be purchased from the local coffee shop, but it's a pretty slick offering nonetheless.

But even with all the similarities, there remain a few key distinctions between these two not-always-so-friendly rivals worth noting.

The differences
Let's get this out of the way upfront: Fool investors give Lowe's the edge, with a CAPS rating of four stars versus Home Depot's three, so Lowe's has that going for it. But there are a few key fundamental drivers investors would be wise to take into account.

Home Depot's pre-tax margin this year of 9% is head and shoulders above Lowe's 5.9%. The same disparity is found in two areas used as a measure of management's effectiveness: return on assets and return on investments. Home Depot's effectiveness in generating shareholder value by adroitly managing the company -- both require managing debt and making strategic decisions -- is nearly twice that of Lowe's in these two, crucial areas.

But the coup de grace for many retail investors, and rightfully so, are same-store sales figures. In other words, how well is the company generating and growing revenue from sites that have been in business for at least a year? For the first quarter of 2012, Home Depot's 5.8% same-store growth was more than twice Lowe's 2.6%.

Home Depot's recent announcement that 2012 revenues should be on target with earlier estimates is another confidence-builder for shareholders and prospective investors.

When it's all said and done (and it nearly is), even the slightest positive news from the housing sector will drive gains in both retail giants. But after further review, the nod goes to Home Depot for consistently producing industry-leading margins and same-store sales gains.

Of course, Home Depot and Lowe's are but two of many retailers, online and brick-and-mortar, to consider. Particularly for those mid- to long-term investors who recognize consumer spending and confidence won't remain stagnant forever, retail is a legitimate option. For a few more ideas, check out our free special report "The Death of Wal-Mart -- The Real Cash Kings Changing the Face of Retail."

Fool contributor Tim Brugger currently holds no securities positions, including any mentioned in this article. Motley Fool newsletter services have recommended buying shares of Home Depot and writing covered calls on Lowe's. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 03, 2012, at 5:01 PM, NovaB wrote:

    With HDs price being almost double Lowe's price they still come out almost dead even on a dollar-for-dollar investment.

    As for company culture, HD and Arthur Blank practice and almost total disregard for employee and customer safety, willing to pay off lawsuits for injuries in the stores while Lowe's has always put their people - employees and customers - ahead of the roaring-twenties-style profit motive.

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