Buy This, Not That: A Blueprint for Profits

Shah Gilani|November 20, 2024

When two retail titans go head-to-head in a nearly $1 trillion market, smart investors know to follow the money.

Today we’re looking at the two leaders of the home improvement space – you know their names – but only one stock is truly hitting the nail on the head.

Recent earnings reveal a structural difference…

One company is building a stronger foundation through an $18 billion acquisition, and the other faces mounting pressures from potential tariffs and shifting consumer behavior.

One has constructed a robust professional contractor business, while the other remains heavily dependent on retail consumers.

One stock is the clear winner… and the other should be left on the shelf.

Get the details in my latest Buy This, Not That episode.

Click on the thumbnail to dive in.

TRANSCRIPT

Hey, everybody. Shah Gilani here with your weekly BTNT, as in Buy This, Not That.

Today, I’m going to pair up the two big home do-it-yourself professional stores you know as Lowe’s (LOW) and Home Depot (HD).

I’m going to start with Lowe’s because earnings came out yesterday.

I’m going to spoil the ending here. The stock’s down. It did not do well yesterday.

Stock is down about 4.5%.

Why?

The company beat on revenue. It beat on analyst estimates for earnings per share, but not by a whole lot. So even though they beat, investors said, “So what? You beat consensus estimates.”

Year over year for Lowe’s, profit fell to $2.89 billion in the third quarter from $3.06 billion in the same quarter a year ago. It’s hard to get excited even though you beat consensus estimates for top line revenues and for bottom line EPS when it’s not that big of a deal.

Lowe’s also guided a little better for the full year.

So little, I should say, that it didn’t really register. I looked at the numbers… the guidance was barely above what it had before.

You could go out a couple decimal places. Really? That’s better than expected forward guidance?

That didn’t impress investors, obviously.

While it raised its outlook, investors look at the general picture for the sector. The sector has been in a slump for a while. Home sales have been slow in terms of turnover, and that means that people aren’t fixing up their houses as much before they sell them, and they aren’t buying as many and then fixing them up when they buy them. So the business has been slow in the space, period.

Maybe lower mortgage rates eventually will help that. Maybe turnover will change for any number of other reasons.

So the numbers were slightly better, but they were also jacked up a little bit because of expectations of what might come as a result of those recent hurricanes, but we’re not going to see that impact really until next quarter.

Sure, management was very optimistic and put good lipstick on earnings and the numbers. But the problem for Lowe’s is 75% to 80% of its business is retail as opposed to professionals buying supplies to build, buying supplies to fix up, remodel. Its customers are more do-it-yourselfers fixing up their homes and doing their own home projects.

It doesn’t have a big slice of the professional side where big home builders need product right away because they don’t get a delivery.

So where are they going to go? To Home Depot.

I’ll get to that.

So as far as Lowe’s goes, I say it’s a NOT.

Another problem that Lowe’s has is something like 40% of their cost of goods comes from outside the United States. If Donald Trump and his incoming administration are going to slap tariffs on foreign goods, that’s going to raise the prices of stuff at Lowe’s.

It’s probably going to do the same for Home Depot, but Lowe’s is going to be impacted more, because of the larger retail side of the business that they attract.

I’m just not a fan of Lowe’s. So let’s take a quick look at the chart.

Frankly, the space is tough enough, period. But look at Lowe’s. That’s not that impressive of a chart. Here’s the sell down yesterday on the earnings that were at consensus beat.

This is what I see. You got a little oversold overbought here and then sold right off. So here’s this, getting enthusiastic and then not so much, and then bang, all of a sudden numbers come out and there you go. Right down through the 50-day moving average, which is the blue line.

So Lowe’s is not a buy.

Now, Home Depot would be the buy in this space.

Home Depot is the BUY. It recently reported earnings, and it beat.

But the thing about Lowe’s versus Home Depot is Home Depot is much more geared toward professionals.

In March, the company made a very strategic and expensive acquisition – I think it was close to $18.25 billion – of SRS Distribution.

SRS Distribution is a Texas-based supplier of pretty much everything in the roofing space and for pools and for landscaping.

But the SRS acquisition was fabulous because SRS Distribution adds a much bigger professional profile to what Home Depot sells.

So the earnings for Home Depot were a beat, and they were a beat… not because of transactions per customer, because they were down… not because of foot traffic per store, because that was down… but because it had a 6% increase in sales, and that came from the SRS Distribution acquisition.

Because SRS Distribution has a lot of professionals who buy products through SRS, now part of Home Depot.

SRS has 2,500 really good salespeople. Nobody knows how many professional salespeople Home Depot has.

In other words, salespeople working the phones with builders, working the phones with companies that are looking for bulk supplies.

They also have 4,000 trucks. Why would they have 4,000 trucks? Because they deliver by the truckload.

So as far as Home Depot goes, it’s much better. It’s got the same problems that Lowe’s has. Business has been slow, but its acquisition was a brilliant move.

And between the two, comparing apples to apples, Home Depot is much bigger with a $404 billion market cap versus Lowe’s $146 billion cap.

Revenue for Home Depot was $154 billion over the last 12 months, versus Lowe’s $84 billion.

Profit margins are similar. Lowe’s is a little lower at about 8.25%, while Home Depot is a little bit higher, at 9.45%.

Both of them are not cheap. The P/E on Home Depot is 25. P/E on Lowe’s is about 21.

So nothing compelling in either one of them, but if you’re going to have to pick, if you want to go into this space, then go with Home Depot. Don’t go with Lowe’s. That’s it for today.

I’ll catch you guys next week. Cheers, everybody.