The housing market has been recovering as sales of new homes increase and mortgage rates decrease. New home sales increased in July, August, and September. In fact, sales of existing homes also increased by 6% for the month of October over the prior year. Moreover, low mortgage rates have enticed people to buy more homes. This, in turn, has created demand for home improvement retailers since the new occupants spend more to improve their new homes.
That's why home improvement players such as Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) have been performing very well. The benefits of a recovering housing market and increased customer confidence were evident in the recently reported results from both companies.
In fact, most companies related to the housing industry have benefited from this trend. Valspar (NYSE:VAL), a coating and paint manufacturer, has also witnessed an increase in demand for its products. Its revenue surged 8.2% in its recently reported fourth quarter over the same period last year. Its earnings also jumped 13% to $0.97 per share. Valspar beat estimates on both metrics. Moreover, Valspar provided a bright outlook since it expects consumer demand to continue rising.
On a roll
Investors can consider any of these companies since each of them are set to grow. But between the two home improvement players Home Depot and Lowe's, it is difficult to pick one. Both companies have provided great returns to investors, as shown in the chart below:
Although Home Depot's stock price has appreciated much more than that of Lowe's, the latter is making a lot of effort to grow. Lowe's has been enhancing its products in order to attract more customers. It has also tried resetting its stores apart from opening new ones so that it can attract more buyers. Lowe's has also started offering low prices for a number of items in order to lure budget conscious customers.
However, Lowe's recent quarter wasn't up to the mark. Although its revenue grew 7% to $12.96 billion, its earnings did not meet analysts' expectations. It could not manage its costs, which led to a weaker gross margin.
Home Depot seems to be outperforming Lowe's yet again. In the recently reported quarter, Home Depot posted great numbers that were way ahead of analysts' estimates. Its revenue jumped 7.4% to $17.5 billion, driven by a 4% increase in the number of transactions and an increase of 3.2% in the average ticket. Also, its earnings jumped 51% to $0.95 per share over last year, helped by cost cutting measures and improving distribution.
Same store sales grew 7.4%, compared to Lowe's 6.2%. Home Depot's growth was driven by its merchandising and tailored marketing efforts. Moreover, Home Depot has a larger market share of 18.7% compared with 15.2% for Lowe's. Home Depot also has more stores than Lowe's. Lowe's will take time to bridge the gap with its rival.
The road ahead
Home Depot is making a number of moves to attract the maximum number of customers during the holiday season. It recently launched a mobile app for customers which will make shopping easier for them. It is also enhancing its website to make its online operations even better.
Additionally, the home improvement retailer is launching new products such as the Nest Protect smoke detector, a carbon monoxide detector, the Cree TrueWhite bulb, and many other products to give consumers more reasons to visit its stores.
To add to Home Depot's merriment, home sales are expected to grow by 5% to 6% next year. According to the National Association of Realtors, home prices will also increase by 6% by the end of 2014.
Clearly, Home Depot looks hot since it is operating in a growing industry and outperforming its peers. Moreover, it is making the right moves, launching new products, and marketing its products well to boost its top line. That's why this company definitely deserves a place in your portfolio.
Pratik Thacker has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.