On the surface, the two companies look similar enough -- perhaps even interchangeable -- to investors. And to be fair, both retailers' fortunes are linked to the same basic economic dynamics.
If you're struggling to choose between owning a stake in either Home Depot (HD 2.75%) or Lowe's (LOW 3.01%), however, know that one of these names has a respectable competitive edge over the other right now. Home Depot is the better pick of the two at this time ... perhaps for a reason you may not have realized.
There's also more to the story.
The same, but different
Sure, they both offer lumber, lighting solutions, household supplies, paint, and just about anything else you might need to keep your home in good repair, or even improve it. While Home Depot may be a measurably bigger company, both home improvement retailers are also big enough to enjoy the full benefits of scale. We also tend to see both stocks ebb and flow in tandem, as do these two retailers' bottom lines.
There's a nuanced difference between the two store chains, though. Home Depot relies on professional contractor business far more than Lowe's does. Lowe's says approximately 25% of its revenue comes from professional contractors, whereas nearly half of Home Depot's business is serving these pros.
Most of the time this disparity doesn't matter. If the economy is humming, both consumers and professional contractors tend to benefit.
Right now, though, this difference is kind of a big deal. It decidedly favors Home Depot.
NYSE: HD
Key Data Points
That doesn't sound quite right in light of the headwinds the real estate market is currently suffering. Mortgage interest rates are still near 20-year highs, and the National Association of Realtors just reported that October's sales of existing homes continued a downtrend to 13-year lows. If many of Home Depot's customers are pros, this headwind seemingly works against it to a greater degree.
Take a step back and look at the detailed picture, however. While sales of homes that have already been built and bought by at least one owner are cratering, the housing shortage continues to drive sales of newly built homes despite high interest rates. The Census Bureau's most recent report on the matter indicates sales of new houses reached an annualized pace of 759,000 in September, hitting levels last seen in early 2022 when they were on their way down.
US Existing Home Sales data by YCharts
In this same vein, housing starts and building permits are holding steady at levels established late last year despite the concerning economic backdrop.
US Housing Starts data by YCharts
Homebuilders will need supplies to start and finish these projects that have already been booked.
And we're seeing hints of the two companies' different customer mixes in their results. Lowe's same-store sales tumbled 7.4% during the three-month stretch ending early this month, while overall revenue slipped nearly 13% year over year. Home Depot's same-store sales fell a more muted 3.5% in its third quarter, with total revenue falling an even more modest 3%.
Home Depot wins
Don't misread the message. One quarter's worth of data doesn't necessarily mark the beginning of a long-lived trend. Also, bear in mind that simply because one company in a particular industry is holding up better than its chief rival doesn't inherently mean it's a buy -- it's possible neither stock is worth owning right now.
On the flip side, with both stocks trading well down from their late-2021 peaks despite both companies proving they're long-term winners, it's not wrong to start shopping around for some exposure to the homebuilding and home improvement space. There's one clear winner in this regard. The DIY weakness Lowe's CEO Marvin Ellison lamented in Tuesday's earnings report could persist into the foreseeable future, doing it more harm than Home Depot. New home construction could also persist, doing Home Depot more good than it does Lowe's.
To this end, both companies' guidance for the remainder of this year suggests not much is going to change for either on the sales front.
Or if that's not convincing enough, maybe this is: Home Depot's current dividend yield of 2.7% is markedly above Lowe's current yield of 2.1%. To the extent all the little things add up, that's yet another reason to consider investing in the bigger of these two home improvement giants.
