Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Good Stocks

Lowes, is Home Improvement Amazon Proof?

The most surprising aspect of the Great Retail Apocalypse is the companies that are “Amazon Proof.” The most recent financial data indicates that home-improvement giants, Lowes (NYSE: LOW) and Home Depot (NYSE: HD) have achieved that coveted status.

Both hardware behemoths reported growing revenues and expanding incomes on July 31, 2017. The financials show us that home-improvement big boxes are thriving in the Age of Amazon.

Revenues and incomes at both companies are soaring. Selling appliances, chainsaws, paint, and lawn tractors is still a very profitable business in today’s America.

Home Depot and Lowes are Thriving in the Age of Amazon

Lowe’s net income reached a new peak of $3.063 billion on July 31, 2017. That was a substantial improvement over the $2.798 billion it reported just a year earlier. That made for an increase of $265 million in six months.

Home Depot’s income growth was even more impressive. Its net income reached a new high of $8.399 billion in July 2017, compared to $7.44 billion in July 2016. The amount of income growth at Home Depot was $959 million during the 12 months that ended on July 31, 2017.

Revenues are also surging at Lowe’s, reaching a new high of $67.88 billion on July 31, 2017. What’ is even more impressive is that Lowe’s revenues grew by $6.79 billion in just a year. Lowe’s reported $61.09 billion in revenues in July 2016 and $67.88 billion 12 months later.

Home Depot is approaching the $100 billion mark in revenues – its revenues reached $97.36 billion on July 31, 2017. Although, its’ revenue growth is less than Lowes, increasing by $5.33 billion in 12 months. Home reported $92.03 billion in revenue in July 2016 and $97.36 billion a year later.

Lowe’s is now growing faster than HD, one has to wonder if its revenues will catch up with those of the larger rival. Something to note here is that Lowe’s revenues are less than $30 billion less than Home Depot’s.

Lowe’s and Home Depot are making a Lot of Money

These chains are thriving but are they making money. After all, today’s retail landscape contains giants like Kroger (NYSE: KR) that have lots of revenue but little or no extra cash.

The answer to the most important question is yes, Lowe’s and HD are making money. Lowe’s reported a free cash flow of $1.505 billion, $6.063 billion in cash from operations and $1.815 billion in cash and short-term investments on July 31, 2017. Home Depot reported $4.83 billion in cash and short-term investments, $10.77 billion in cash from operations, and a free cash flow of $2.91 billion on the same day.

The home-improvement giants are not only growing, they are generating a lot of float. That makes Lowe’s a value investment, and Home Depot a good investment, because both companies have a lot of value, and Lowe’s seems underpriced.

Are Lowe’s and Home Depot Value Investments?

Both Lowe’s and Home Depots have a lot of value. Home Depot reported assets of $45.96 billion on 21 July 2017, and Lowe’s reported $36.67 billion in assets on the same day.

What is more interesting is that both companies seem undervalued. Ycharts gave Lowe’s a market capitalization of $66.13 billion and an enterprise value of $80.25 billion on September 28, 2017. Home Depot had a market cap of $191.38 billion and an enterprise value of $209.83 billion the same day.

Lowe’s is definitely the better stock because it is cheaper and growing faster. Lowe’s was trading at $79.40 a share on September 28, 2017. Home Depot was selling for $162.35 a share on the same day, which looks overpriced to me.

Despite that both stocks are good investments that pay a good dividend. Home Depot paid a dividend of 89¢ a share on August 29, 2017. Lowe’s is scheduled to pay 41¢ on October 24, 2017, up from 35¢ in April.

To add icing to the cake Lowe’s rewarded shareholders with a stellar return on equity of 49.38% on July 31, 2017. Home Depot was even more pleasing with an incredible return on equity of 174.1% on July 31, 2017. So nobody will go wrong with these stocks.

Are Lowe’s and Home Depot Really Amazon Proof?

The attributes that make Lowe’s and Home Depot Amazon proof are fairly obvious. They sell a lot of big-ticket items that UPS and FedEx will not deliver including appliances, lumber, lawn mowers and large plumbing fixtures like bathtubs.

The two companies also specialize in items that people like to see in a physical setting. Cabinetry and paint are not like toilet paper, people actually like to see them before they order. Also aiding Lowes is the nature of some of its customers; many of them are small contractors that need same-day delivery of specialized merchandise like lumber.

Both companies also operate in markets that Amazon (NASDAQ: AMZN) has ignored until recently. It was only this summer that Amazon started selling appliances from Sears (NASDAQ: SHLD) in one city – Los Angeles. Amazon is also building new fulfillment centers capable of shipping big ticket items so it is a long-term threat.

Home Depot and Lowe’s still seem to have a pretty strong moat against Amazon. The Everything Store has not made a serious attempt to compete in the home delivery of appliances and building supplies yet.

Is Amazon Lowes’ Friend?

A strong case can also be made that it is Amazon which is driving Lowe’s and Home Depot’s growth by driving competitors like Sears out of business. These companies’ revenue growth obviously parallels Sears’ revenue shrinkage.

The continuing closure of Sears and Kmart locations; along with horrendous customer service in those retailers, is driving many customers to Home Depot or Lowe’s. YouTube is now filled with videos of deserted Sears’ stores that look like ghost towns with no employees or customers visible.

There are also numerous articles about disgruntled customers storming out of Sears; and heading for Lowes or Home Depot, after finding no service in the appliance section. Perhaps Home Depot and Lowe’s shareholders should send Sears CEO Eddie Lampert a thank-you note. He might be the best friend they have.

Amazon is no direct threat to Lowes or Home Depot now but it can be. A huge threat to Lowe’s or Home Depot would be Amazon buying Best Buy (NYSE: BBY) and using its resources to enter the appliance market. Another would be Amazon purchasing Kenmore from Sears and offering its appliances online.

Fortunately, such threats are presently theoretical. Until then both Home Depot and Lowe’s are Amazon-proof and should remain so for years to come.