Investors buying into Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) as plays on the housing market's impressive recovery may want to roll up their sleeves and dig a little deeper. Headier growth can be found in specialists in home improvement, including hardwood-flooring retailer Lumber Liquidators (NYSE:LL) and wood-alternative decking leader Trex (NYSE:TREX).
Lumber Liquidators came through with another blowout quarterly report this morning, fueled by property buyers and cozy homeowners who keep investing in stylish hardwood planks and laminates to spruce up their digs. Revenue soared 23% to $258.4 million, fueled primarily by an impressive 15.6% spike in comps. Margins widened to the point where earnings skyrocketed 51% to $20.8 million, or $0.74 a share. Analysts were only holding out for a profit of $0.72 on $255.7 million in revenue.
Trex reports next week, and while it's not expected to grow its sales at Lumber Liquidator's pace, it is growing a lot faster than Home Depot and Lowe's. Trex shareholders will also likely be treated to a strong reversal on the bottom line, and that's a cherry on top for a stock that has more than quadrupled over the past five years.
Looking out to the year ahead, it isn't even close. Lumber Liquidators is sticking to its earlier guidance, calling for $1.15 billion to $2 billion in revenue on healthy positive comps clocking in between the high single to low double digits. That's nearly 18% growth at the midpoint. Wall Street sees Trex growing at an even healthier 21% clip. Home Depot and Lowe's, on the other hand, are only expected to grow their sales this new fiscal year at a 4% to 5% pace.
It's not even close. Sure, there are trade-offs. Trex and Lumber Liquidators are trading at 24 and 27 times, respectively, this year's projected profitability. Lowe's and Home Depot are trading at multiples in the high teens. Income investors may also be drawn to the modest payouts that the superstore chains provide. Home Depot's yielding 2%, and Lowe's is currently at 1.5%.
But are the slightly lower valuations and the extra pocket change worth passing on specialists growing several times faster?
Yes, things could start to turn for the worse.
January housing starts clocked in at a weaker than expected 880,000 this morning. Rising mortgage rates can cool the resale market. But if the home-improvement trend continues, you're better off with the real growth story stocks in Trex and Lumber Liquidators.