Home Depot jumps on rising profits
But with expectations for its smaller rival too low, Lowe's may be the better investment.
Shares of Home Depot (HD) rose Tuesday morning after the largest home improvement retailer reported better than expected earnings and gave bullish guidance. Yet rival Lowe's (LOW), which reports results November 19, may be the better stock to buy.
Home Depot's results were outstanding given the current economic climate. Net income at the company rose 1.4% to $947 million. or 63 cents per share. Excluding one-time items, profit was 74 cents per share. Sales rose 4.6% to $18.1 billion. The results surpassed analysts' expectations that called for profit of 70 cents on revenue of $17.93 billion, according to Thomson Reuters.
Not surprisingly, Home Depot raised its fiscal 2012 guidance and now expects sales to grow 5.2% this year, ahead of analysts' forecasts of a 4.9% gain. The company expects to earn profit of $3.03 per share on an adjusted basis, beating analysts' expectations of $2.97 per share.
Though investors may be tempted to buy Home Depot stock today, they should wait because the shares, which have surged more than 45% this year, are expensive. They are trading at a price-to-earnings ratio of 21.87, their highest level in the last five years, according to Reuters.
The average 52-week price target on the stock is $62.16, near where it currently trades.
Lowe's, which is struggling to emerge from Home Depot's shadow, may be the better play here because expectations for the company are low after its latest dismal earnings report, as the AP reported. Revenue in the current quarter is expected to fall 7.3% and be flat for the fiscal year. Analysts are expecting profit of 35 cents per share in the quarter, the same as a year ago. Profit in the January time period is expected to fall to 21 cents per share versus 29 cents per share. Analysts expect yearly profit of $1.66 per share, unchanged from the year-earlier period.
Given how well Home Depot performed, it seems logical to assume that Lowe's will benefit from the same trends that are helping its larger rival. This is not a play, however, for the faint of heart.
Lowe's is trading at a price-to-earnings ratio of 21.8, a five-year high, according to Reuters. The average 52-week price target on the stock is $32.55, about where it currently trades. Investors are skeptical about Lowe's efforts to revamp its merchandise and pricing strategy. But even if the company hasn't resolved those issues, Lowe's probably will in the not-too-distant future. The rewards associated with Lowe's outweigh the risks.
Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter@jdberr.
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