Home Depot, Lowe’s: Bottom-Line Boost from Isaac?

Home Depot, Lowe’s: Bottom-Line Boost from Isaac?

REUTERS/Mario Anzuoni/Mike Blake/The Fiscal Times

Hurricane Isaac became Tropical Storm Isaac once again Wednesday after making landfall in the southeastern United States, but the while Gulf Coast residents assess the damage from the slow-moving storm, investors are evaluating the impact on stocks across sectors such as energy, insurance and even gaming.

Offshore oil and natural gas production was largely shut down leading up to the storm, according to the Bureau of Safety and Environmental Enforcement, and gasoline prices saw their biggest one-day jump in 18 months, but early reports say the regions refineries were left largely untouched by the hurricane. Insurers and casino operators shouldn’t suffer big hits either.

But Isaac – and others, starting with Joyce and Kirk, that may follow in its wake – may have an unexpected benefit for home improvements stores like Home Depot (HD) and Lowe’s (LOW). Unhappy residents of Louisiana, Florida and other states that tend to bear the brunt of the hurricanes as they land are likely to spend heavily to stock up on everything from plywood with which to cover their windows to batteries for their flashlights. Once the storm has passed, it will be back to the home improvement store again, in search of help to repair storm and water damage.

Home Depot is so aware of both the needs of its customers in hurricane-prone regions and the potential for profits (both immediate and longer-term) in being able to provide what they need when they need it that it keeps a distribution center in Florida stocked with hurricane supplies, ready to be shipped out on a moment’s notice. It also has negotiated access to roads that might otherwise be blocked to “regular” traffic with officials in some states, including Louisiana. For its part, Lowe’s has offered its customers “Hurricane How-To” clinics, teaching them everything from how to install hurricane shutters to how to operate a power generator safely.

Unless September proves to be a particularly nasty month for hurricanes, it isn’t likely that storm season will dramatically alter the fortunes of either company. But along with the improvement in the housing market, it’s another development that could lead to both retailers doing slightly better in the coming months.
Home Depot has already been faring reasonably well, even amidst a more lackluster housing environment. Now that builders are seeing demand for new houses pick up – and now that homebuyers are willing to pay more to acquire a house, after two straight years of lower prices – Home Depot’s ability to provide those builders with whatever they need, from hammers and nails to sheet rock, may well pay off. (And let’s face it, it’s hard to justify shopping online for heavy items that are costly to ship.…) The size of the company’s average ticket – the amount a customer spends in its stores on each visit – jumped 12 percent in its fiscal second quarter, and Home Depot is one of a handful of S&P 500 companies that has boosted its earnings forecast for the coming months.

If you don’t like the fact that a lot of the upside potential for Home Depot already is priced into the company’s stock – up more than 70 percent over the last year – consider its chief competitor. Lowe’s is in the midst of a slow and painful turnaround, which has continued to weigh on the company’s financial results – same-store sales growth at Lowe’s has lagged that at Home Depot for the last three years, and the former’s margins are shrinking. Lowe’s also cut its earnings forecast.

But if you believe that the housing market turnaround will be real and lasting, then Lowe’s is the company to think about owning. Its stock trades at 18 times trailing earnings and offers a yield of 2.26 percent, compared to a multiple of 20 times earnings for Home Depot, and a yield of only about 2 percent. (Lowe’s also is buying back its stock – a clear sign that the company’s board believes in its future prospects and isn’t worried about preserving cash for tough times ahead.) Yes, that gap reflects an additional level of risk associated with owning Lowe’s, but there also is greater upside potential. Since the rate of growth in tickets over $900 was a healthy 3.4 percent at Home Depot, Lowe’s may also begin to perform better, given that its product mix tends to tilt more toward costly items like appliances and kitchen cabinets. At the very least, it will be easier for the company to beat earnings expectations than it will be for Home Depot to deliver a big positive surprise on the new, higher forecast.

It’s a gamble that the company’s management is taking the right tack, but absent any signs of fundamental problems, it likely will be Lowe’s that ends up generating the biggest upside from here. Any company making fundamental changes to the way it does business will find itself in turmoil temporarily, but at least as it approaches the end of that process (which management has said will be mid-2013), the odds are that it will be helped along by tailwinds, rather than battling headwinds.