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Amazon's latest assault wipes $12.5 billion off Home Depot, other appliance-seller stocks

  • Stocks of retailers that sell appliances were hit hard Thursday after Amazon said it would sell Sears' Kenmore-brand appliances.
  • Whirlpool, which makes appliances under the Whirlpool and Maytag brands, was also slammed, but the company also makes some appliances under the Kenmore brand.
  • Some analysts saw a buying opportunity in home improvement stocks Home Depot and Lowe's, among the best performers in the retail space and so far viewed as "Amazon-proof."

Shares of Home Depot and Lowe's were slammed Thursday, along with Whirlpool, after Amazon threatened to take on the appliance market in a much bigger way in a deal with Sears Holdings.

The market cap loss in Home Depot, Lowe's, Whirlpool and Best Buy was about $12.5 billion by the end of the day, after falling to more than $13 billion. Amazon stock was up slightly, and Sears closed up about 10 percent.

But the early read from some analysts was that the sell-off has created a buying opportunity for home improvement retailers Home Depot and Lowe's, which have proven themselves to be somewhat "Amazon-proof" and among the best performers in the sector. Best Buy, already battling Amazon in electronics, ended the day about 4 percent lower.

Sears, which has been losing share in appliance for years, saw its stock rally as much as 25 percent early Thursday, soon after it announced it would sell its Kenmore-branded appliances on Amazon.com. The products will be compatible with Amazon's Alexa platform.

"The net takeout is it's a potential negative for pricing and profitability for white box appliances," said Bob Wetenhall at RBC. "I don't think Alexa is the big deal here. … It's more the fact that Amazon is going to sell Kenmore-branded appliances."

"It's probably less of a Whirlpool issue," said Wetenhall, adding the price pressures would hit retailers. He said Whirlpool is the source for about half the appliances in the Kenmore brand, at one time a household standard and now a laggard. Wetenhall said it's too early to know how the deal will affect the integration of appliances and online retailers, and there were few details offered.

"It's hard to know," said Wetenhall. "Does the guy come out to your house to install it? It's a totally different thing."

Analysts at Robert W. Baird said the selloff in Home Depot and Lowe's was an overreaction. The nearly $7.5 billion market cap loss in Home Depot stock equals slightly more than the amount of its annual appliance sales. Lowe's stock loss was a little more than 50 percent of its $7 billion in annual appliance sales.

The analysts said Home Depot and Lowe's are by far the dominant retailers in the sector, and Amazon's online sale of appliances has not harmed them so far. With the Sears deal, Amazon will now be selling a product line not available in Home Depot and Lowe's stores.

Once a dominant force, Sears Holdings appliance sales account for about 15 percent of its total sales of $3.3 billion in fiscal 2016.

"Appliances have been a key driver of growth for both [Home Depot and Lowe's] over the past few years … so we understand the concern the announcement creates. That said we view the [approximately] $12 billion market cap reduction in [Home Depot and Lowe's] … to be an overreaction," the Baird analysts wrote.

They said the two retailers have about half the $30 billion in annual sales in the appliance sector. They are also benefiting from a pocket of strength in home improvement sales, compared with the rest of the retail sector, which has been crushed by consumers shifting to online shopping and changing tastes.

Oppenheimer analysts said they see the deal as more of a lifeline for Kenmore than a threat to the home improvement retailers, which have made big inroads into appliance sales.

"We think a link up with [Amazon] should prove beneficial for the Kenmore brand. But, in our view, such a relationship is more likely to keep Kenmore alive, even as [Sears Holdings] continues to falter, than pump new life into the legacy brand," wrote Oppenheimer analysts. "Over the past several years, [Home Depot] and [Lowe's] put forth significant efforts to enhance their lineups of appliance products and advertise themselves as key sellers of the category to target consumers."

Oppenheimer retail analyst Brian Nagel said in a phone interview that appliances are a difficult business and while Amazon gains a new foothold with the Sears deal, the logistics of the products are difficult in terms of installation and the need to ship quickly.

Over the years, Home Depot and Lowe's, which sell an array of building and home improvement products, have taken a great deal of share from Sears and its Kenmore brands.

"Home Depot and Lowe's are smart companies. They know what they're doing," he said. Nagel prefers Home Depot to Lowe's. Home Depot stock is up 9 percent on the year, versus a 1 percent gain for Lowe's.

Nagel said he's recommending investors buy the stocks on weakness. "It's frustrating for investors. News like this puts doubt in the minds of investors. You have these high multiples, and people are selling."

Wetenhall said he sees the retailers more at risk because of the pricing element. Whirlpool also has its own Amazon deal, already announcing a smart Alexa product lineup. "We think it's a negative, but it's not a death blow to the head," he said of Whirlpool. Whirlpool also makes Maytag products.

"Whenever Amazon gets into a category, you worry about pricing. Price matters, but it's not a huge factor. There's been a lot of innovation in appliances, and people are looking more at the capabilities of these products, rather than prices," Nagel said. Amazon reports quarterly profits on Thursday.

The two home improvement companies have been able to withstand the assault from Amazon, which recently broadened its threat to the retail sector with its plans to buy grocer Whole Foods.

"I think there's a nice moat around their businesses," Nagel said. "Home Depot sells 50,000 products. There are likely products that sell online better than others. But Home Depot stores are known for great service." He said the retailer has a strong goods stocking system and powerful private-label brands.

JPMorgan analysts have also said the home improvement companies are doing well defending themselves from Amazon. They have noted that 40 percent of Home Depot online orders are picked up in stores, and the professional market is 40 percent of Home Depot's business and 30 percent of Lowe's.

Appliances were 11 percent of Lowe's total annual sales last year, and 8 percent of Home Depot's fiscal 2016 sales.

Lowe's stock was down 5.6 percent and Home Depot's down more than 4 percent Thursday.

Market value loss for appliance sellers July 20

Source: Factset

CNBC's Gina Francolla contributed to this story