Home Depot Vs. Lowe's

If you missed Cramer’s series on valuing stocks that we ran last week, let’s review. He ran side-by-side comparisons of companies based in the same industry, assigning points for how well these firms performed in different categories like sector, growth and dividend.

Now he’s adding key metrics to this list of things to consider since different industries have different ways to measure execution. Restaurants are measured by their ability to control food costs. Retailers have to produce good same-store sales numbers and store growth. Drug stocks need to have a strong pipeline and extensive patent protection. The better you know these key metrics, the better able you are to value a specific stock.

Today he put the system to work valuing Home Depot and Lowe’s . As usual, sector is the first factor we look at because half of a stock’s worth is derived solely from its sector. These two companies operate in the home-improvement business, a specific part of the retail sector that depends heavily on the housing market. And while that market has been in big trouble for some time, Cramer said we should hit a bottom by this time next year. And HD and LOW both beat earnings recently, proving that Wall Street is too negative on this group. So out of a possible five points for sector – half of Cramer’s 10-point scale – we’ll give them 2.5 because Cramer sees them as 2s moving to 3s. Score: 2.5-2.5, tie.

Growth is always the second thing we look at because this is what money managers want the most. Remember, growth is like crack on Wall Street. And when it comes to retailers, growth is measured by same-store sales, market share trends and saturation. So how’d Lowe’s and Home Depot stack up? Well, both companies reported same-store sales that were better than expected. But on top of a good number, Lowe’s guided up for the next same-store sales report. For that reason Cramer gave the company one point. HD got a half point for performing almost as well. Score: 3.5-3, Lowe’s.

Next we’ll consider market share. Bottom line: Lowe’s is taking it, Home Depot’s losing it. Lowe’s took share in 17 of its 20 product categories, gaining a 1.2% share, while HD lost share in eight of 13 categories. Another point to Lowe’s. Score: 4.5-3, Lowe’s.

Lowe’s takes the saturation category, too, because it still has so much room to grow. The company opened 23 stores last quarter and has plans to open another 120. Last quarter, Home Depot opened a net of zero stores because it had to close some underperforming outlets, and the company expects to open only another 55. One more point to Lowe’s. Score: 5.5-3, Lowe’s.

Home Depot does earn half a point for having the better dividend, 3.3% to Lowe’s 1.4%. Score: 5.5-3.5, Lowe’s.

So there’s no doubt, according to Cramer’s 10-point scale of stock valuing, that Lowe’s is the better company. But it’s trading at a multiple very close to Home Depot, 15.5 versus 15.3, respectively. Needless to say, Cramer wouldn’t buy HD at that price, but he did say that Lowe’s is attractive on a pullback to $22 or $23.

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