Are Home Improvement Retailers Hammering Out Enough Value?

Submitted by Morgan Smith as part of our contributors program.

With the real estate market still in a state of flux, many homeowners have decided to stay put and expand or improve on their current residence – and this has so far been good news for some of the large home improvement retailers like Home Depot (HD) and Lowes (LOW). In this article, I will discuss why big home improvement retailerrs can still nail down value for their share holders.

For years, the mantra of the big box retailers has been their low, low prices. Yet, while this is good for customers’ wallets, there are a few areas where these stores could improve – particularly in the customer service and product selection arena.

Taking a Closer Look at the Big Box Giants

Home Depot is considered one of the largest home improvement retailers in this competitive industry sector. With a market cap of more than $93 billion, the company currently has a P/E ratio of just above 22, which exceeds the overall S&P 500 Index P/E ratio of 17.7.

Even though Home Depot’s revenue growth is a bit behind the industry average of 12.7%, the company has brought its earnings per share up by over 17% in the third quarter 2012 as compared to the same quarter in 2011. In fact, over the past two years, Home Depot has been relatively consistent in this area. As far as its bottom line earnings, the firm has also improved by earning $2.46 per share in the third quarter 2012 as compared to $2.02 for the same quarter of last year, and it is expected by analysts that this will continue to improve to $2.97 for the fourth quarter of 2012.

While the company’s dividend yield stands just below 2%, Home Depot can offer investors a great value. The home improvement giant was recently reiterated by TheStreet Ratings as a Buy based in large part by the solid performance of its share price, as well as the growth in the company’s revenue, earnings per share, and net income.

Home Depot’s net income growth, while also exceeding that of the S&P 500 Index, was less than that of the overall specialty retail sector. The company’s net income grew to over $1.532.00 million in the third quarter 2012, as compared to slightly over $1,363.00 million in the same quarter a year prior.

Another home improvement giant, Lowes, has seen some positive numbers as well due to the vast increase in the movement by many homeowners to keep what they have and fix it up – also helping to move the recommendation by TheStreetRatings analysts to a Buy.

Yet, even though Lowes reported flat earnings per share for the third quarter of 2012, between the third quarter of 2011 and third quarter 2012, the company’s share price has risen by over 50%, also exceeding the broader market’s performance during that same time period.

There are factors that also seem to indicate that Lowe’s operates with a strong management team. For example, its stable earnings per share of $1.42, which is expected to rise to $1.66 in 2013, along with its low debt-to-equity ratio. In addition, while not considered to be substantial, currently, Lowe’s offers its investors a dividend yield of 2%.

Certainly, the home improvement market – or just about any market – would be lack to count out Wal-Mart (WMT). Even though this retail giant offers a much smaller product selection on the home improvement side than Home Depot or Lowes, the company definitely has an edge in the everyday low-price arena.

With a market cap of nearly $255 billion, Wal-Mart operates its retail stores in various formats worldwide, with its three primary business segments inclusive of Walmart U.S., Walmart International, and Sam’s Club. While Wal-Mart’s dividend yield of just over 2% is not extremely impressive, the company’s share price is expected to increase by roughly 6.5% over the next 12 months.

Although the big box stores can compete on price, there is one area – specialization – where they all may fall a bit behind. This could affect market share for the big boxes if they are not careful. Some of the smaller specialized home improvement and décor retailers like Swags Galore are starting to gain momentum in terms of pinpointing and capitalizing on specific areas of the home improvement market. With its heavy focus on the curtains and blinds area, along with stellar customer service, Lakeville, Pennsylvania based Swags Galore has become a well-recognized supplier for those who are in the process of upgrading or changing anything that involves a window or shower. Swags Galore specializes in selling curtains, curtain rods, sconces and shower curtains for kitchens, bathrooms and much more. In addition, the company’s discount prices and convenient online ordering services could allow them to sneak up on the likes of Lowes, Home Depot, and the other big guys in terms of value and eventually even market share.

The Bottom Line

Given the strong numbers for all three of these big box retailers, I feel that any and all are nice additions for investors. Wal-Mart continues to pay out a steady dividend to its investors – and with expectations of more positive holiday season buying, these shares could rise even in the shorter term.

With investors noticing the numerous positive factors for Home Depot, share price has risen over the past year by over 71%, which exceeds that of the S&P 500 Index. Yet, even though the shares have risen sharply, I feel that there is still enough room for the shares to provide a good overall value.

As for Lowes, even though the company has attained subpar growth in its net income, I feel that there are several other factors such as its nice return on equity, as well as its solid share performance, that outweigh that and make it a good addition for investors in terms of both income and long-term growth.