Using Smarter Metrics On Home Depot, Lowe’s

As hard as it may be to envision right now, amid the cold and snow in much of the U.S., we’re soon heading into the big spring thaw. And that’s typically when homeowners turn to house TLC and renovation projects, whether it be for their own use, or because they are readying a home for sale. Harvard’s Joint Center for Housing Studies expects outlays for remodeling in the first half of the year to hit their highest level since the housing crash, as strong home appreciation (and deferred maintenance since the crash) spurs more spending on home repairs and upgrades.

The Joint Centers’ Leading Indicator of Remodeling Activity forecast looks at the four-quarter moving average for remodeling spending. For the 12 months through the end of the first quarter the outlook is for a 14% pickup over the year earlier level, and another 14.7% gain in the 12 months through the second quarter. By the third quarter of this year the rate of growth is expected to slow down, but to a still strong 10%. The $154 billion projection for 12-month spending by the end of the third quarter of this year compares to the $119.4 billion for the third quarter of 2011.

But as seen in this chart of 20 stocks in the Dow Jones Home Improvement Index, this sector has indeed already had quite a run with the resurgence in post-recession home spending.

^DJUSHI Chart

^DJUSHI data by YCharts

At first glance the two behemoths in the space, Home Depot (HD) and Lowe’s (LOW) look like they might be only marginally on the expensive side, with trailing 12 month PE ratios of 20 and 22 respectively. But pull out the lens a bit and their current price relative to their longer-term earnings, captured in YCharts’ PE 5 and PE 10 metrics, illustrates how the stock prices have recently shot well past the pace of longer-term earnings growth.

Here’s Home Depot:

HD PE 5 Chart

HD PE 5 data by YCharts

And Lowe’s:

LOW PE 5 Chart

LOW PE 5 data by YCharts

That suggests that current expectations are already priced into the stocks.

While FactSet says home improvement stores have the strongest expected same store sales outlook within the retail sector, that’s merely faint praise: we’re still just talking about 4.9% growth. And that’s right in line with Home Depot’s 2014 sales guidance. Lowe’s fiscal year closed January 31; when it reports FY results later this month we should get some guidance on the coming year. Back in November it said it expected 6% sales growth for its 2013 FY.

Home Depot deserves an extra dollop of circumspection. Stock repurchases have helped it goose earnings per share growth coming out of the recession. While the recent news that Apple (AAPL) used its recent stock slump to scoop up more shares at lower prices, Home Depot shows no compunction about buying back shares high and higher.

HD Stock Buybacks (TTM) Chart

HD Stock Buybacks (TTM) data by YCharts

That helps explain the divergence between EPS growth and net income growth:

HD EPS Diluted (TTM) Chart

HD EPS Diluted (TTM) data by YCharts

Home Depot says it expects to spend another $5 billion on repurchases in 2014. To dig deeper, unleash some financial advisor tools on these stocks.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

Read more articles about: Company Analysis  stocks that look pricey   

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