Home Depot (NYSE: HD) and Lowe's (NYSE: LOW) reported third quarter earnings this week. Home Depot started us off with a blowout and left analysts bullish on Lowe's, who reported the next morning. However, Lowe's came out with a mixed quarter, but still showed strong growth year over year. Let's break down each report and compare the growth to last year to see who had the better third quarter and decide which company is more worthy of an investment.
Home Depot is the largest home improvement specialty retailer in the world. It currently operates 2,260 locations in the United States, Puerto Rico, U.S. Virgin Islands, Canada, Mexico, and Guam. Lowe's is the second largest home improvement specialty retailer behind Home Depot. It has 1,831 locations in the United States, Canada, and Mexico.
On Tuesday, Nov. 19, Home Depot reported third quarter results that blew past analyst expectations. Here's a summary of the results:
|Earnings Per Share||$0.95||$0.89|
|Revenue||$19.50 billion||$19.17 billion|
Earnings per share grew 28.4% and revenue rose 7.4% compared to the third quarter in 2012. Gross profit rose 8.5%, assisted by the company's gross margin expanding by 64 basis points versus the second quarter to 34.92%. Global comparable-store sales rose an incredible 7.4%, with the U.S. showing 8.2% growth. Home Depot's chief executive officer noted continued improvement and strength in the housing market as one of the drivers for the company's success. Overall, it was an absolute blowout quarter for Home Depot and the stock has reacted accordingly.
On Wednesday, Nov. 20, Lowe's released its third quarter report and it was mixed compared to analyst estimates. Here's an overview of the report:
|Earnings Per Share||$0.47||$0.48|
|Revenue||$12.96 billion||$12.72 billion|
Earnings per share increased 34.3% and revenue rose 7.3% year over year. Gross profit rose 8.2%, driven by gross margin expanding 23 basis points versus the second quarter to 34.58%. Also, global comparable-store sales grew 6.2% from the same period in 2012. Lowe's management confirmed the positive comments from Home Depot by stating, "The home improvement industry is poised for persisting growth in the fourth quarter and further acceleration in 2014." Although this was a mixed quarter, Lowe's showed strong growth year over year. This leads me to believe that the analyst estimates for Lowe's were a bit too high.
So whose report was better?
Let's compare the year-over-year results from Home Depot and Lowe's and decide which company had the better third quarter:
|Key Metrics||Home Depot||Lowe's|
|1. Earnings Growth||28.4%||34.3%|
|2. Revenue Growth||7.4%||7.3%|
|3. Quarterly Margin Expansion||64 basis points||23 basis points|
|4. Updated Gross Margin||34.92%||34.58%|
|5. Comparable-Store Growth||7.4%||6.2%|
|6. Raised Guidance?||Yes||Yes|
Based on these six key metrics, Home Depot had the better third quarter report. With that said, Home Depot spiked to a fresh 52-week high after its report was released and currently sits just 2.6% below that mark. Lowe's, on the other hand, has fallen over 4.5% after its report and currently sits more than 7.5% below its 52-week high. I believe Home Depot is the better company for the next 10 years.
The Foolish bottom line
Home Depot and Lowe's both reported great results this week. Home Depot blew past expectations, while Lowe's fell just short, causing the stocks to move in different directions. Both companies have the potential to outperform the overall market for years to come and provide both dividends and share repurchases along the way. Investors should look to buy Home Depot on any significant pullback or weakness provided by the market. Take a look and see if your portfolio could use one of the home improvement kings.
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