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Is the Home Improvement Industry on Shaky Grounds?

Friday - 11/23/2012, 6:08pm  ET

The world’s second largest home improvement retailer, Lowe’s Companies reported its third quarter earnings on Monday. The company has reported better-than-expected results which helped the share price surge. The Boom in the overall home improvement business and Lowe’s efforts to cut cost and improved merchandise selection has brought it almost neck to neck with its arch rival Home Depot .

Numbers and Share Repurchase

Lowe’s reported its third quarter revenues at $12.07 billion improving by 1.9% from the same quarter last year. The net earnings were reported at $376 million up by 76% on the year. Earnings per share have beefed up by 94.4% and have been reported at $0.35 per diluted share. The earnings have improved as in the first nine months 124.4 million shares were repurchased for $3.6 billion, retiring roughly about 10% of its shares outstanding.

Industry and Lowe’s

Lowe’s result is an indication that home-improvement retailers and other housing related companies are benefiting from the rebound of the housing market. The boom in home sales and better deals for mortgage loans is helping Lowe’s and Home Depot’s business. Home Depot reported higher third-quarter net income and raised its full-year forecast signifying that the future prospects are enormous.

The company has a fair share of the home improvement sector which is still growing but its job cuts and curbed store expansion can have negative impacts. The company’s pricing strategy has been offering consistently low prices on many of its items across the stores, instead of offering sudden discounts. The response to the strategy has been slow and might take the middle of next year to reap benefits.

Lowe’s sales has boosted because of preparation and rebuilding efforts tied to Sandy in its third quarter and the clean-up activity should continue in the fourth quarter and extend in 2013, helping sales to further improve. Post clearance, the company’s major focus remains on value improvement and product differentiation which should yield return as it is at the moment.

The Biggest Home Improvement Company at its Peak or Not

Home Depot is now a $93.6 billion company which makes it clear that the market has overreacted to home improvement momentum. The third quarter sales were $18.1 billion, a year-over-year growth of 4.6%. The weekly sales per operating store were $616,000, 4.4% higher than Q3 2011. The company has outperformed its own expectation in the current quarter and Hurricane Sandy has created huge demand about the company’s products and services. Home Depot has a strong balance sheet with cash in hand of $2.5 billion along with a balanced debt and equity. Home Depot is thus better placed than its rival Lowe’s.

A Leap further

If we think about competition in the home improvement business we just get two big names Home Depot and Lowe’s and two privately held companies Menard Inc and Sears, Roebuck and Co. The competition stretches further as the world’s largest retailer, Wal-Mart , provides household articles alike others in the industry. The company’s global presence, proving prowess and customer foot-fall takes away home improvement business with its home furnishings and house wares.

A Foolish Thought

The home improvement industry as a whole seems to be reviving which has good prospects for Lowe’s, but it’s already trading at a high P/E Multiple and has a high debt load. I feel Home Depot is also fairly priced and fluctuations in price due to improvement in sales and the overall housing business should be low. Both companies performance should no doubt be good but its reflection on their stock prices might be missing. I do not suggest buying at current prices.

This article was originally published as Is the Home Improvement Industry on Shaky Grounds?on Fool.com

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