Restoration Hardware (NYSE: RH ) , Home Depot (NYSE: HD ) , and Lumber Liquidators (NYSE: LL ) are all home-improvement companies whose stocks have traded quite differently in 2014. While one specific stock's upside far exceeds its peers, all share the same value trait for investors.
The classic buy-and-hold stock
Home Depot is the face of home improvement as the largest single retailer for all facets of the industry. From 2011 to 2014, Home Depot was one of the better performing large-cap stocks due to low interest rates and a willingness among consumers to increase the value of their homes via remodeling. Also, a slowly improving housing market since the recession hasn't hurt its growth.
Yet, Home Depot has essentially traded flat during the last 12 months, which has therefore created an investment opportunity. Specifically, the stock now trades at just 16 times forward earnings, which is only a slight premium versus the S&P 500 index. Home Depot is one of the best fundamentally performing large retailers in the market, expecting comparable sales growth of 4.6% this year and an operating margin of 12%.
During its last quarter, comparable sales rose just 2.2 %, meaning the company must anticipate a strong second half of the year given its guidance. Nonetheless, Home Depot has been a strong performer in just about every facet of its business, and with shares underperforming the market, it might very well present a good opportunity for long-term shareholders.
After losses, it's finally presenting an investment opportunity
Like Home Depot, Lumber Liquidators was a solid stock performer in years past but has seen shares fall from a high of $120 last year to just $75 today. The company focuses on flooring, therefore its exposure to the entire home-improvement sector is limited. Nonetheless, Lumber Liquidators is expected to grow revenue by 16% and 15% over the next two years, respectively.
Therefore, at 17.5 times forward earnings, Lumber Liquidators is just slightly more expensive than Home Depot with three times the growth. This implies that shares are in fact presenting investment value.
With that said, Lumber Liquidators is a small company, and while projecting the next two years may be possible, it's hard to know what the long-term future holds. Therefore, Home Depot with a dividend and aggressive buyback policy likely presents the better long-term value, but for shareholders looking for an underpriced growth company Lumber Liquidators looks like a solid choice.
Best of the high-end world
Restoration Hardware caters to the wealthy with high-end home improvement, operating nearly 70 gallerias over the last two years. Since its first-quarter report on June 11, shares have soared from $65 to a high of nearly $95. But for buy-and- hold investors, the potential gains are just getting started.
At 30 times forward earnings, Restoration Hardware is anything but cheap. However, owning Restoration Hardware shares is an investment in a future that involves rapid store expansion in a company that has grown comparable-store sales by 57% over a two-year span.
With $1.6 billion in 12-month revenue, peak sales are expected to reach $5 billion with an operating margin in the mid-teens as the company expands from 69 stores to more than 100 during the next few years. Hence, with a market capitalization of $3.5 billion and explosive growth, there are still large gains available in a company whose growth is atop the entire retail sector.
Home Depot and Lumber Liquidators both look like good opportunities, but Restoration Hardware is truly a special company right now. Restoration Hardware has become the go-to store for the wealthy population, which bodes well for its long-term performance.
This is a company that earns much of its revenue from direct sales via catalog ordering and keeps its products unique by working with hundreds of small- and medium-sized vendors to keep styles fresh. These are two key elements to Restoration Hardware's business that have allowed it to thrive, and as its expansion program gets under way, the company has given us no reason to doubt its ability to execute on demand and create significant growth.
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