Stephanie Link: Don't Count Out HD and LOW
NEW YORK (TheStreet) -- Year to date both Home Depot (HD - Get Report) and Lowe's (LOW - Get Report) are off 7% on concerns about the lackluster demand from the consumer and the potential negative impact from the cold/wet weather that has been seen around the country in December, January, and the first part of February (we are all anxiously awaiting the next big snow storm that is expected to hit the North East tomorrow).
There are also questions about where we are in the housing cycle and whether or not the Do-it-Yourself retailers have been played out - last year HD was up 33.1% and LOW's rallied 39.5% and from the March 2009 lows HD is up 320% and LOW up 241%. I think the decline in each of them is an opportunity to buy into a theme that has more upside and where comps should continue to be strong for the next several years. Certainly, weather has played a role in likely depressing the near-term traffic trends, but over the long term, housing sales continue to recover, driving consumers to furnish them and fix them up.
For reference - the housing recovery is definitely evident with New Home Sales at a 414,000 annualized rate vs. the February 2011 low at 270,000 annualized and Existing Home Sales currently stand at 4.87 million annualized vs. the July 2010 low at 3.45 million annualized rate. I also look at the U.S. housing turnover figures and although we have seen higher levels of activity, the National Association of Realtors and U.S. Census Bureau say we are still 10.4% below its 25 year average - so more room to run. In addition, the prices of homes continues to rise with the most current Case-Shiller and CoreLogic figures showing a 12% increase in home prices in the latest month of data. This is the most important driver of renovation and remodeling spend and both Masco (MAS) and Owens Corning (OC) confirmed this strength in their quarters this week.
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For HD and LOW the tailwinds from the housing recovery are definitely a positive. But the market share opportunities are also a plus, especially in the appliance category. Here, both should benefit from the downsizing that is happening at Sears (SHLD) - which still carries a 29% market share (in dollars) in Appliances and also has a 25% share in Tools and 17% in Power Lawn & Garden. At HD's analyst day in December management estimated that they had a 230 bps comp lift just from industry market share increases in appliances. Product innovation, in stock supplies, and strong customer service initiatives will also lead to higher comps. In addition, big opportunities will come from their e-commerce build out (HD's online sales are roughly 15% of total sales and we estimate less than 10% at LOW) as well as the return of the Professional sales segment driven by omnichannel strategies.
These two ideas aren't new to investors by any means, but the pullback in the shares and the attractive valuations make them both interesting at the current level. HD and LOW both trade at .9x PEG - well below their historical averages - HD's historical is 1.3x and LOW 1.1x. For two companies that will post upper teens to low 20% earnings growth this year and next and several positive tailwinds ahead , now may just be the time to get in and take advantage of what everyone is so nervous about - the weather.
--Written by Stephanie Link in New York.