Are Home Improvement Stores Still A No Brainer?
As housing approached its inevitable turnaround a couple of years back, it was a no brainer thesis that home improvement companies would benefit in line with the recovery. Home Depot's stock has appreciated nearly 100% in two years, while Lowe's is just a few points behind at 92%. In recent periods, both companies have delivered stellar earnings and raised their forecasts for the future. Fortune Brands Home and Security , the company behind major home goods names such as Masterlock , Moen Faucets, and Simonton Windows, has seen its shares travel up 150% in the same time. Of course, it's easy to spot a great investment when looking back in time. The question now is, has the market fully awarded the value of the housing recovery to home goods stocks?
While housing has already made its major rebound (some say its heading back down the bubble path at this point), a few statistics still point to a near required level of growth in the industry. In the early months of 2013, new housing starts remained well below their historical averages. Even with the homebuilders working overtime to meet demand, housing inventories remain incredibly low.
We haven't seen new housing data from anything since the summer, though, as the government shutdown prevented the U.S. Census Bureau from releasing new housing starts data for September and October. The latest date for that info is Dec. 18, and should give us a better idea of where things sit with the housing pipeline.
Regardless of the exact number, all three companies appear to be facing attractive industry conditions for at least a couple more years. But even a great business can be a bad investment if the price isn't right.
Home Depot, Lowe's, and Fortune Brands trade at forward earnings ratios of 18.01 times, 18.02 times and 21.6 times, respectively. P/E's are by no means the end-all of valuation of metrics, and even the rich-looking numbers are not to suggest that the companies' growth can't match, or even outperform. The figures do give us a few clues, though, as to how the market views the companies and what it offers investors.
Home Depot and Lowe's seem nearly indistinguishable by the market's view. The companies have both been coming in at or ahead of estimates, delivering strong guidance, appreciating in value at the same rate, and have a near identical forward valuation.
On an EV/EBITDA level, Fortune Brands is again the most richly valued at 18 times, with Home Depot at 11.1 times and Lowe's at 10.25 times. Price to sales puts Lowe's the cheapest at 0.95 times.
Given that the market views Home Depot and Lowe's so similarly (understandably so), and that the two businesses are likely to continue their mimicry of the gains in the housing industry, it makes sense to pick the better priced of the two.
When it comes down to it, all three companies are priced for decent growth and will likely hit those targets, barring a slowdown in the industry (unlikely). Fortune Brands isn't quite the same business as Home Depot and Lowe's, and has the advantage of solely owning great brands. It's a more predictable business than the retail stores of the latter two, and on a fundamental level is more attractive. But, for the investor looking to earn a mint on the undeniable fact that this country needs more housing, the cheaper plays, and Lowe's in particular, are still attractively priced.
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The article Are Home Improvement Stores Still A No Brainer? originally appeared on Fool.com.Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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