Investopedia: A Solid Beat-And-Raise As Lowe's Closes Some Of The Gap

While neither Home Depot (NYSE:HD) nor Lowe's (NYSE:LOW) were exactly what I thought of as “cheap” a quarter ago, I did think Lowe's looked like the better buy as I believed the Street would start factoring in improving operations and more HD-like performance. That call seems to have worked out, as Lowe's shares outperformed Home Depot by nearly 15% over the last quarter. As Lowe's still looks cheaper than Home Depot and has more upside to operational improvements/outperformance, I would probably stick with Lowe's over Home Depot, but almost anything house-related in retailing seems strong these days.

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Investopedia: Home Depot Moves From Good To Great

While it shouldn't really surprise anybody if there's a little volatility or turbulence along the way, it looks like the long-awaited remodeling upturn is firmly in place now. Not only did Home Depot (NYSE:HD) trounce expectations for same-store sales growth, but companies like American Woodmark (Nasdaq: AMWD), RPM (NYSE:RPM), and Stanley Black & Decker (NYSE:SWK) are seeing improved prospects as well. While these shares didn't do much over the last three months and the valuation is not what I'd call “screaming bargain”, I wouldn't step in front of the momentum with my own money.

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Investopedia: Lowe's Had Better Start Improving

It seems like a fuzzy memory now, but Lowe's (NYSE:LOW) was once seen as the superior operator to Home Depot (NYSE:HD) on the big-box home improvement battleground. Times have definitely changed, though, as Home Depot has gained an edge not only with its store locations (more stores in or near urban centers), but also with its merchandising. Making matters worse, Home Depot has significantly closed the gap (if not leapfrogged) Lowe's in an area where Lowe's once dominated – back-office logistics and cost management.

Even if Home Depot has been operationally de-pantsing Lowe's recently, it doesn't show up in the stocks over the last year – they both have nearly equal 60%-plus gains to their credit. Look at the two-year, five-year, or 10-year comparisons, though, and you see a wide gap between the performance of Home Depot and Lowe's (in favor of Home Depot). While there is a lot that Lowe's could do to close the gap and be a relative out-performer, the real question has to be “will they?”

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Investopedia: Waiting For Housing To Recover, Valspar's Recovery Already Arrived

Data on the residential housing market has been getting better. Prices and sales activity have both improved, and data from the major big-box home improvement stores Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) suggests that homeowners and contractors are back at work fixing up properties.

While the aforementioned data has been incremental, many housing-related stocks have already posted strong runs. One of them, paint and coatings manufacturer Valspar (NYSE:VAL) is already up 75% over the last two years and about 46% over the past year. While declining TiO2 prices and improving demand should both help results, as will a growing presence in emerging markets, the stock seems to already be testing the high end of its typical valuation range.

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Investopedia: Toro And The Runaway Recovery

Wall Street is always looking for a rebound play, and there has been no shortage of interest in going long on the housing/consumer recovery this year. While data from home improvement superstores like Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) does indeed support the idea that the worst has passed, investors have been pretty aggressive in bidding up many residential housing plays. Toro (NYSE:TTC) remains a top-notch manufacturing company, but absent a buyout bid, it seems hard to see how cash flow is going to grow fast enough to leave much upside on the table for today's buyers.

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Investopedia: The Third Quarter Was Good To Lowe's

One quarter ago, I said I favored Lowe's (NYSE: LOW) over Home Depot (NYSE: HD), as I thought the difference in valuation outweighed the difference in quality between the two companies. So far, so good with that call, as Lowe's basically doubled Home Depot's return for the past three months. While I do worry that both stocks are a little expensive on the basis of investor optimism for a housing recovery, I won't rule out the idea that an improved business plan coupled with improving sales trends will be a powerful boost to earnings and cash flow for Lowe's over the next few years.

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Investopedia: For Home Depot At Least, The Recovery Looks Real Enough

I'll start this article by openly acknowledging that there seems to be things about Home Depot (NYSE:HD) as a stock that just seem to escape my grasp. While I have ample respect for the quality of the business and the management team, as well as the prospects for a housing recovery to reignite free cash flow growth, the Street always seems to be willing to pay more for Home Depot than I would imagine. So although I personally won't pay a double-digit EV/EBITDA multiple to buy a mature retailer, I'm not going to suggest that Home Depot's momentum ride is over yet.

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Investopedia: Buy Lowe's For Tomorrow, Not Today

Investors have a very clear choice in the home improvement/big-box home retailer sector. Home Depot (NYSE:HD) is posting solid growth, gaining share and raising guidance, while rival Lowe's (NYSE:LOW) is struggling amidst a meaningful change in its merchandising and inventory management. While Home Depot is definitely hard to beat for near-term momentum, investors with more of a value inclination ought to take a closer look into what's going on at Lowe's.

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Investopedia: Home Depot Continues To Ride A Stop-Start Recovery

Investors seem to be pretty committed to the idea that a real recovery is underway in America's housing market. While earnings reports from companies like Armstrong World Industries (NYSE:AWI), Mohawk (NYSE:MHK), Masco (NYSE:MAS) and Stanley Black & Decker (NYSE:SWK) did not support an unequivocal bull argument, the stocks recovered pretty quickly.

What's more, leading home improvement retailer Home Depot (NYSE:HD) continues to report rebounding sales in a wide range of housing-related product categories. Although Home Depot shares seem ahead of themselves on valuation alone, momentum will likely stay with the stock until the beat-and-raise pattern is broken.

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Investopedia: Quanex Is Going To Take Some Time

There's still not that much joy to be found in the residential building world. While the superstores Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) have seen improvement in same-store sales and companies like Louisiana-Pacific (NYSE:LPX) are well off the lows, the actual building starts numbers still aren't good. That means investors considering the shares of Quanex Building Products (NYSE:NX) need to have some patience. While this company has built impressive share in markets like window and door components, demand still just isn't that strong. Quanex does seem undervalued on the basis of its potential long-run free cash flow, but with so much of that growth coming in the foggy future the risk here is above average.

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Investopedia: Now It's Lowe's Turn To Play Catch Up

It turns out that there wasn't room for two big-box retailers in book retailing or electronics, but that may not be the case in hardware and home improvement retailing. Neither Home Depot (NYSE:HD) nor Lowe's (NYSE:LOW) are showing the same sort of troubles as Barnes & Noble (NYSE:BKS) or Best Buy (NYSE:BBY), perhaps because so many of the goods they sell make little sense as online orders.

While there may be room for two, it seems like Home Depot and Lowe's are fated to play a lifelong game of leapfrog. Home Depot has solved many of the problems that drove away customers and is now trying to drive better savings through logistics. On the flip side, Lowe's looks like it's in the middle of a problem-solving store reset program, and its performance is lagging.

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Investopedia: Has Home Depot Already Had Its Recovery?

What a difference a year (or three) makes. While the building superstores Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) have definitely taken their licks from the rotten housing market, these companies are well past the worst of the storm. Not only have Home Depot shares more than doubled from their early 2009 lows, but investors have become optimistic to such an extent that the company is posting substantially better results and still missing some estimates.

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Investopedia: RPM Seeing The Benefit Of The Recovery

It's quite common to see the market reward companies for recoveries even before the evidence is all in hand. Although RPM International (NYSE:RPM) shares haven't been as strong as those of Fuller HB (NYSE:FUL), Sherwin Williams (NYSE:SHW), or Valspar (NYSE:VAL) over the past year, investors have nevertheless pushed up these shares over the past six months. Ongoing recoveries in the consumer and industrial markets could certainly drive the shares even further, but investors should realize that they're no longer looking at a markedly cheap stock.

Surprisingly Strong Third Quarter Results
RPM certainly helped its case with strong fiscal third quarter results. Revenue rose more than 15% as reported and nearly 11% on an organic basis, and handily surpassed the sell-side estimates. Interestingly, revenue was strong across both businesses; industrial saw a 12% revenue improvement on 7% volume growth, while consumer revenue rose more than 18%.

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Investopedia: Toro Not Exactly A Charging Bull

Lawn and turf care specialist Toro (NYSE:TTC) arguably could have picked a better time to focus on improving its cost structure and working capital requirements, as the turbulence in the housing market and overall economy had a big negative impact on equipment sales. Although the company still has low margins and a modest sales growth outlook, the company generates a fairly compelling stream of cash flow. Nevertheless, it does not leap out as a great buy candidate today.

A Good Quarter, but Does Anybody Care? 

Toro delivered a solid quarter, at least in respect to expectations. Revenue rose 9%, as the larger professional segment (up less than 6%) was boosted by the nearly 13% growth of the residential business. Toro easily topped out above the high end of Wall Street expectations, but this is not an especially well-followed stock.

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Investopedia: RPM Still Rolling Ahead

The construction industry is still in lousy shape, whether an investor looks at the residential or commercial segments. That makes RPM International's (NYSE:RPM) performance all the more interesting; although volume is not strong, it is positive and the company seems to be holding its own despite no real tailwinds to help it along.

Beginning the Fiscal Year on a Good Note  
RPM managed to get off to a good start for the fiscal year. Revenue rose more than 10% and the company surpassed the high end of the analyst estimate range. Top-line performance was balanced in terms of growth; the consumer business saw sales up 9% while industrial revenue rose almost 11%.

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Investopedia: Are Buybacks A Bad Sign?

In the last decade or so, a common theme has emerged from U.S. boardrooms - when the going gets tough, companies start buying their stock. There are plenty of valid reasons for companies to repurchase their own stock, particularly when markets sell off and valuations drop. On the other hand, buybacks are not a terribly productive use of cash, and investors may be right to worry whether a spate of repurchase announcements in the face of a worsening economic environment is going to make things worse in the long run.

 

Who's Doing The Buying?  

The past few weeks have seen several large share repurchase announcements. Lockheed Martin (NYSE:LMT) and Lowe's (NYSE:LOW) take the cake with announcements of $1 billion and $5 billion plans, respectively. Maxim Integrated (Nasdaq:MXIM) is in for $750 million, Celgene (Nasdaq:CELG) added $2 billion to its plans, Marsh & McLennan (NYSE:MMC) is looking to buy back $1 billion, and Covidien (NYSE:COV) has a $2 billion plan in place.

 

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Investopedia: Lowe's Still Seeing Only Slow Progress

Investors don't need to wait until Lowe's (NYSE:LOW) or Home Depot (NYSE:HD) report earnings to know that the housing and big-ticket consumer spending environments are tough. The news is still full of stories about the high rate of foreclosures, the low rates of housing starts and the ongoing discrepancy between the recovery that large corporations are seeing and the recovery that individual consumers are experiencing.


A Tough, Disappointing Start to the Year
Lowe's started the fiscal year by missing on both its top and bottom line numbers. Revenue dropped 1.6% this quarter, coming in about 3% lower than analysts expected and below even the lowest published estimate. Poor top line performance was fueled by disappointing comps - down 3.3% from last year's level. While weather certainly played a role, weather is a convenient excuse for retailers; funny how weather never seems to keep shoppers from places like Lululemon Athletica (Nasdaq:LULU).


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Investopedia: Home Depot Pulls Ahead Of Lowe's

Hopefully the management at Lowe's (NYSE:LOW) are racing fans, because it seems like NASCAR tracks are about the only place where Lowe's is really beating Home Depot (NYSE:HD) these days. While both companies are clearly pulling out of the depths of the one-two punch of the housing crash and recession, Home Depot seems to have pulled ahead in many operating metrics and this fiscal fourth quarter is a good opportunity to assess where these two rivals stand. 

Good Caps to the Year, But Better For HD
Both companies ended 2010 on solid notes, but Home Depot is likely to come away with the gold ring for this quarter. Home Depot saw revenue rise just under 4%, with comp growth of 3.9%. That comp growth, in turn, was comprised of average ticket growth of 2.6% (people buying more) and transaction volume growth of 1.4% (more people buying).

Without wanting to make too much out of it, it is notable that Home Depot saw comps fade throughout the quarter - a detail that would have been more concerning in the absence of pretty healthy guidance. It is also worth noting that "real" comp growth was more on the order of 2-2.5%, as the company benefited from a more aggressive position in appliances and a home improvement credit. (For more, see Analyzing Retail Stocks.)

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Stocks I'm Looking At - Craftmade

I have not been as regular with these pieces as I had originally hoped, so apologies for that.

Craftmade (CRFT.PK) is a stock that I have watched off an on for a very long time, but it slid off my radar during the post-housing bubble implosion. Now I come back and find that it is not even a regular listed stock anymore (note the "PK" that comes with the ticker these days).

Even though this company and stock has gotten knocked around a bit, it looks interesting to me. Still, there is a particular concern I have that I will get to later.

What They Do
First things first - Craftmade is largely in the business of designing home furnishings like ceiling fans, lighting, and patio furniture. All in all, patio furniture was close to 60% of sales in the last 10-K.

Craftmade runs an "asset light model"; the company handles design and distribution, and relies upon Chinese and Mexican manufacturers for that step. Lowe's (NYSE: LOW) is far and away the biggest customer, but the company also lists Bed, Bath, and Beyond (Nasdaq: BBBY), Costco (Nasdaq: COST), and Wal-Mart (NYSE: WMT) as customers. Notably, Home Depot (NYSE: HD) is NOT a customer ... presumably they have some sort of exclusive relationship with one of Craftmade's rivals.


Where They Are At Today
Unfortunately, while the housing crash has been bad news for the company, it is not as though things were great before then. Sales growth has been pretty erratic throughout the last ten years, and I tend to like companies with a much steadier progression.

Still, this is a real business trading for less than book value, even though accounts receivable are 140% of the company's equity.

What really intrigued me about this stock was that the valuation is baking in very little progress or improvement in the business. The company has historically turned about 7% of its sales into free cash flow. If you assume 6% revenue growth for the next five years (the 10-yr avg is about 6.5%), and a free cash flow yield moving from 0% this year to 5% in five years (so, still below the long-term average), 5% free cash flow growth for five years after that, tapering down to 3% and then 1.5%, and discount it at 13%, you get a price target of $10.75.

That is quite attractive relative to today's $5.76 share price, right?

Here is where things get weird.

The Shadow of Litex
The company is being actively pursued by Litex Industries - a private competitor. The history of this is sort of typical - Litex came in with a lowball offer ($3.25/sh), created a lot of publicity, and got rebuffed. Then Litex tried a $5.75/sh hostile tender. That did not work either.

Toward the end of the tender, apparently Litex quietly approached the company and said they might offer more than $7/sh. Craftmade said "no", but offered a confidentially agreement as a precondition to some further negotiations. Litex did not take that offer, and then made a verbal offer for $7.50/sh, which the company also refused.

This is where it gets interesting - apparently Craftmade said they would consider $8.75/sh. Since then, Litex apparently has talked about offering $8/sh, but has not sat down with Craftmade and attempted to meet their requirements.

The Final Question
Okay, I apologize for that digression, but it raises my biggest concern - my model suggests the stock is worth almost $11/sh, but the company is willing to sell for $8.75. Does this mean my estimates are too opimtistic, or is this a case where the board at CRFT would settle for less for the certainty of a deal?

After all, CRFT's business is not consistent, and the company does not produce reliably great ROIC. Moreover, if anything goes wrong in the Lowe's relationship, the company is in deep trouble.

So, I suppose it is back to the drawing board here on valuation. I still think this opportunity is intriguing (even notwithstanding the irritation of a possibly insincere or opportunistic would-be acquirer). But when the board of a company is indicating that the company is worth about 20% less than you initially thought it was, that is certainly reason for pause and reflection.

Unwrapping The Home-Improvement Big Boxes

Now that the "great retrenchment" in consumer spending has been going on for a couple of years, are shoppers itching to cast aside survivalist shopping at Wal-Mart (NYSE:WMT) and return to the likes of Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) to buff up their houses? 

Although one quarter does not prove a thing, Home Depot and Lowe's both did something this week that they have not done in almost four years each - they posted positive same-store sales growth for a full quarter. Perhaps, then, this is the renaissance of two of America's most successful retail concepts.  

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