Comparing Home Depot And Lowe's

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With my investment, I was able to capture a nice dividend yield of 3.6%... more than double the five year average of 1.3%.  Of the 19 analysts who covered the company, only 6 rated it a "buy".  This was positive in my mind.  When analysts start upgrading the company, I’m sure the stock will jump in value.

Analysts had been cutting back on growth estimates.  It was expected given the economic environment.  That being said, the company wasn’t exactly struggling.

When I invested they had just posted earnings for the first nine months. They did $56.6 billion in sales and generated more than $4.0 billion in operating income.  Best of all they had profits of more than $2.3 billion.

So who was the company?

It was Home Depot (HD) the big box retail store you’d find in almost every city in America.

So back to relative performance…

As I was monitoring my Home Depot investment, I noticed the stock was outperforming their next biggest competitor Lowe’s (LOW).  This outperformance wasn’t a small blip.  I’m talking a significant change in stock price over the last month or so.

Just look at the chart.  Like they say, a picture’s worth a thousand words.



As you can see, despite the horrible environment Home Depot is down 10%, not great but not bad either.  Lowe’s on the other hand is down more than 25%.

That’s a huge 15 percentage point difference in performance.  It’s a difference that shouldn’t be ignored.

So what’s going on?

In my opinion, the outperformance is tied to one thing… Good management vs. Great management.

In a tough market, like we’re in now, you want to invest with industry leaders.  Those are the companies with great management making the right moves to protect shareholder value.

The importance of skilled management was recently made clear.  Last week, both companies announced expectations for 2009.

Lowe’s announced first.  They indicated 2009 sales would be down 2% and EPS to be in the range of $1.04 to $1.20.  Home Depot wasn’t much better.  They indicated fiscal 2009 sales to be down 9% and EPS to be down 7%.

As you can probably tell, Home Depot looks to be struggling a bit more than Lowe’s.  Yet after these announcements came out, Lowe’s stock dropped and Home Depot’s went up!

It seems strange… unless you do a bit of research.

See, just a few weeks ago Home Depot management announced a major restructuring (though they didn’t call it that).  The company is closing its EXPO business and a few other smaller operations.  They’re also looking to reduce staff by almost 7,000 or 2% of the workforce.  All great cost saving moves the company needed to make.

Lowe’s has yet to make any big moves like this.

Home Depot came out and warned about their problems early.  Analysts had time to adjust estimates appropriately.  So when the company announced earnings, they beat estimates.  This caused the stock to rally.  (Don’t you love Wall Street?)

Lowe’s, on the other hand, missed analyst estimates.  They failed to prepare analysts for weaker results before reporting them.  When Lowe’s missed estimates, the stock price fell.

I hate to say it, but little things like this are the difference between good and great management.  That’s why I own Home Depot in my portfolio. And, I’ll continue to own it for years to come.  You might consider picking up some for your own portfolio.

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