Home Depot (HD) Vs. Lowe's (LOW): Which Is The Better Stock?

The US Commerce Department announced positive news for the housing market yesterday, stating that housing starts climbed 6.6% in April. This represents a seasonal adjusted annual rate of 1.17 million units added.

The news bodes well for corporations tied to the housing market, such as home improvement companies. Now could be a great time to load up on some reliable stocks from this segment, so which one will bring the most profits to your portfolio?

Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) are some of the largest competitors in the home improvement sector. Within the last week, both companies reported earnings beats on our consensus estimate, and they have seen their share prices move higher as a result. Which stock is better though? Below, we compare value, growth, and earnings related metrics to decide which company makes for a better investment choice right now.

Lowe’s Companies Inc.

Lowe's specializes in offering products and services for home improvement, home decor, home maintenance, home repair, and remodeling and maintenance of commercial buildings. Lowe’s is a Zacks Rank #2 (Buy), and it has a market capitalization of about $68 billion. The company beat quarterly earnings expectations this morning, posting EPS of $0.87 when our consensus estimated $0.85. This represents a 2.35% beat.

Value

Lowe’s stock trades at a forward PE of 19.08, and it also has a PEG of 1.24. This is noteworthy, as the average PEG in the industry is 1.40. LOW has a nice price-to-sales of just 1.09. When a company’s price-to-sales ratio is below one, the stock may be undervalued. LOW isn’t below this threshold, but it is pretty close. The company has a debt-to-capital of 60.13%, which is a little heavy when compared to the industry’s average debt-to-capital of 44.33%.

Growth

This year, Lowe’s projects earnings and sales growth of 21.81% and 5.69%, respectively. While this is great news, LOW’s profit margins in general are pretty slim. Its trailing twelve month net margin is under 4.5%.

The Home Depot

Home Depot is among the largest home improvement retailers in the world. Home Depot stores cater to do-it-yourselfers, as well as home improvement, construction and building maintenance professionals. HD has a market capitalization of about $165.2 billion, and it is a Zacks Rank #2 (Buy). Home Depot beat our quarterly earnings consensus estimate by 7.46% when it reported its earnings yesterday, posting EPS of $1.44.

Home Depot’s valuation is somewhat lofty, as it trades at a forward PE of 21.16 and has a PEG of 1.57. HD lags behind Lowe’s across both of these metrics. Home Depot’s price-to-sales is 1.76, and it has a debt-to-capital ratio of 76.78%. The company is somewhat leveraged, but it has high quality cash flows to back it up. Home Depot posts significantly higher profit margins than Lowe’s, posting net margins of 7.92%.

Bottom Line

While Lowe’s appears superior to Home Depot valuation-wise, HD has LOW beat on the sales and profitability front. Both companies appear to be great investments, and each of these corporations have been spending billions of dollars every year over the last five years to repurchase their own shares. This suggests that the companies are betting on their own performance.

While both stocks look impressive on the cash flows front, we’re going to have to give Home Depot the edge in this contest. Home Depot has seen significant sales growth over each of the last five years. Year after year, Home Depot has succeeded in growing its profit margins as well. When a company grows its revenues and margins significantly at the same time, its operating cash flows stand to see a large increase as well. This helps to increase our confidence in Home Depot as a solid investment choice over the long run.

Lowe’s, unfortunately, has not proven itself to be as consistent as Home Depot over the years. From fiscal 2015 to 2016, net margins for Lowe’s have actually decreased, going from 4.79% to 4.3%. Both these companies have seen significant growth in their dividend payouts over the years. Based on income growth though, it looks like Home Depot stands to be able to grow its dividend payout at a faster rate than Lowe’s over the long run.

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