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The Home Improvement Industry Will Benefit From This Rebound

Friday - 3/15/2013, 2:19pm  ET

The economy has improved mildly, but there has been a significant recovery in the housing market. A boom in the housing market compliments the home improvement industry. Recently, two of the biggest names in the home improvement industry, Home Depot and Lowe's , reported earnings. Let’s see what these stocks hold for the investors, keeping an eye on improving construction and home sales.

Number crunching

Home Depot's quarterly sales improved 14% to $18.2 billion compared to the same period last year. At Lowe's, sales dropped 5% to $11 billion. On the face of it, Home Depot looks a clear winner, but if we look closer, it is evident that it enjoyed the advantage of an extra week over Lowe’s, as they have different year ending dates.

If we remove the impact of the extra week, Home Depot’s sales will be reduced by $1.2 billion to a net 6.3% growth. Similarly, if we remove a week from last year, Lowe’s sale would be 2.8% higher instead of a 5% loss. The fact still remains that Home Depot has performed better than Lowe’s, and the good news for both is that housing sector is improving.

Signs of improvement

The housing market is finally showing improvement, which can be clearly gauged as D.R. Horton, the country's biggest builder, reported a  39% increase in revenue and a 139% hike in profit compared to last year. The demand for homes is currently outnumbering supply, which is the main reason of the rise in home prices. Furthermore, according to the Wall Street Journal, homes available for sale have been the lowest in January since last year.

Moreover, there is a 16% increase from December, and almost 30% from last year when it comes to the new homes sold. There is also an increase in previously-owned homes, surging 9% compared to last year, reaching 4.92 million homes (Source: The National Association of Realtors). Both new homes and previously-owned homes do require home-improvement, and with an increase in both, the home-improvement industry will most certainly benefit.

Which of the two is a better pick?

Investors in Home Depot have plenty of reasons to be happy, including a strong earnings report, optimistic guidance, an increased dividend, and a substantial buyback plan. The company has increased its dividend 34% to $0.39 a share in the recent quarter. It has further announced a fresh $17 billion share buyback, which it should complete by the end of fiscal year 2015. This means investors have a lot of reasons to be happy, with a great amount of cash being returned to them over the next three years.

The guidance for both companies for the year ahead is modest. Home Depot expects revenue to grow 2%-3% on a comparable sales basis this year. Whereas Lowe's expects a growth of 4% in sales and a 3.5% raise in comparable sales. The outlook looks slightly better for Lowe’s, but Home Depot enjoys certain advantages that make it a better choice for investors.

Most importantly, Home Depot’s same-store sales have grown consistently over the last 30 quarters, as they have an advantage of converting footfall into sales by offering customer convenience with their key store locations.

Moreover, Home Depot operates at a better margin of 10.26% compared to Lowe's 7.26%, and utilizes its assets in a far better way, which is evident from its ROA of 24.15%, versus 6.33% of Lowe’s. Both these advantages are because of its scale of operations, which is almost 1.5 times that of Lowe’s. Furthermore, Home Depot has lead the way in making things easier for its customers by bundling products with services such as hiring professionals for DIFM projects.

Foolish final words

Both Home Depot and Lowe’s have a positive outlook for the coming year and should benefit from the rebound in the housing industry. An investor can use either of the stocks to diversify his portfolio, but Home Depot is the better pick.

This article was originally published as The Home Improvement Industry Will Benefit From This Reboundon Fool.com

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