Why Home Depot Stock May Be Worth the Premium Over Lowe’s?

Question: Why invest in Home Depot stock (NYSE: HD) at 25 times earnings when Lowe’s stock (NYSE: LOW) is available at a lower multiple of 19? Actually, you would, especially when you consider these simple facts:

1. Growth: Home Depot’s revenue is growing at a relatively faster rate, over 4% in the last twelve months, while Lowe’s revenue growth has decelerated by 3%. In addition, Home Depot generated around $160 billion in revenue in fiscal 2024, 90% more than its arch rival.
2. Margins: Home Depot’s profit margins exceed 13%, meaning a larger portion of their revenue growth directly translates into profits for shareholders. In contrast, Lowe’s operates with around an 11% operating margin.
3. Tariffs: Both seem comparable. Home Depot and Lowe’s are both exposed to economic headwinds due to the nature of their business models. They source a significant portion of their products globally, particularly from China, Canada, and Mexico, while their sales are largely concentrated in North America. Manufacturing is often outsourced to these regions, making them susceptible to trade disruptions and tariffs. Key product categories at risk include lumber, steel, aluminum, plumbing fixtures, and various tools and hardware items.

Image by Steve Buissinne from Pixabay

Is Home Depot A Safe Bet?

While some might consider Home Depot a “safe haven,” its track record during past market shocks tells a different story. In the 2022 inflation-driven downturn, Home Depot dropped over 35%, and during the 2020 pandemic, it fell around 38%. Clearly, HD isn’t exactly a “safe stock.” Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

That said, Home Depot has already seen a notable pullback, dropping from nearly $425 in January this year to about $354 now (as of April 10). For investors seeking a potentially more stable and high-performing alternative, consider the Trefis High Quality portfolio. This strategy has outperformed the market with over 91% returns since its inception, as demonstrated by its HQ performance metrics.

Home Depot’s Strategic Initiatives Could Drive Growth

Home Depot’s strategic focus on the professional market is supported by investments in digital tools, Pro Desk services, and in-store enhancements. These initiatives have led to increased engagement, as more customers rely on financing for projects or delay larger renovations due to elevated interest rates. Its large scale enables strong investment in marketing, supply chain, and omnichannel capabilities, reinforcing its competitive edge.

With most U.S. homes between 31 and 60 years old, demand for renovation and repair remains strong, even if not driven by new home purchases. Home Depot’s balanced revenue split between Do-It-Yourself (DIY) and pro customers positions it well, especially as pros, who typically make larger, repeat purchases, drive a significant share of growth. In contrast, only about 30% of Lowe’s sales come from pro customers.

Potential Risks to Consider

Despite its strong fundamentals, investing in Home Depot carries notable risks. A primary concern is the potential for earnings disappointment, particularly if rising costs further compress profitability. This risk is heightened by the current economic environment, where many companies are focusing on cash preservation, cutting back on R&D, and expansion initiatives. Home Depot’s ability to navigate these challenges will depend on its cost management and sourcing diversification strategies.

Additionally, the risk of unforeseen events, such as sudden economic shocks—cannot be ruled out. Investors should be aware that in a worst-case scenario, the stock could face a significant downside of up to 40%. Importantly, reacting to such a decline by selling could harm long-term returns, underscoring the need for a patient, strategic investment approach.

Long-Term Perspective

Despite these potential challenges, for long-term investors with a 3-5 year horizon who are comfortable with volatility, Home Depot at its current levels could represent an interesting entry point. For those seeking strategies to navigate market downturns and potentially capitalize on them, exploring options like the Trefis  Reinforced Value (RV) Portfolio, which has outperformed its all-cap stocks benchmark (combination of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to produce strong returns for investors, or consulting a financial advisor with experience in bear markets could be beneficial. Remember, significant wealth can be generated in the market by those who maintain a calm and strategic approach during periods of volatility.

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