Sometimes one company cannot be discussed without another entering the conversation. The Home Depot (NYSE: HD) reported a 66% drop in first-quarter profit Tuesday, largely due to a one-time charge and continued weakness in the housing market. Only a few days ago, Lowe's Co. (NYSE: LOW) reported sizable losses too.
"Weakness in the housing market" -- in many places that is a gross understatement, since there is no market and they are giving houses away. There are places where home sales have stabilized, and based on April figures it appears that home construction was up when including apartment development. But there are still millions of single family homes and condominiums available at fire sale prices.
Atlanta-based Home Depot said it earned $356 million, or 21 cents a share, in the three months ending May 4, compared to a profit of $1.05 billion, or 53 cents a share, a year earlier. It announced earlier this month that it was putting the brakes on some of its expansion plans and said it would do what was previously unthinkable -- close 15 of its flagship stores. The move, to be completed by July, affects 1,300 employees
As is clear from Battle of the Brands: Home Depot vs. Lowe's, there is much contrast between the two companies but in the end they both address the same market and as long as that market is down their stock prices will find few prospects for growth.
Home Depot closed yesterday at $28.87, 30% off it's 52 week high of $41.19. It has been bouncing around between $25 and $30 a share for the past seven months. Given it's 3% dividend yield, I think it is worth putting on your watch list for a possible buy if it touches "bottom" again.
Lowe's hasn't done any better, closing yesterday at 24.25, 27% off its 52 week high. Lowe's has been below $20 a share and might be a buy if it sees that level again but the dividend yield for this expanding company is not nearly as generous at 0.72%. Even though an argument can and has been made that Lowe's is the better managed company with more growth potential, I still favor HD as an investment.
The dividend is important, in particular because it is only guesswork as to when the housing market will bounce back. In the meantime you are getting a healthy return from a stock that has been beaten down pretty well. The differences between the two companies will be overshadowed by macro economics in the initial stages of a recovery. After that, Lowe's management may make a difference.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I do not own shares of HD or LOW.
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