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The Home Depot, Inc. (HD), Lowe’s Companies, Inc. (LOW): Invest in the Improving Housing Market and Sleep Well

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The housing market outlook is shining! There are several reasons why I believe new home sales will continue to improve:

  • Dr. Ben Bernanke (yes, he studied hard to earn his Ph.D) is not likely to raise interest rates from their current historic low levels.
  • The consumer confidence index is improving. Mortgage interest rates are low, and consumers are starting to take advantage of it.
  • Unemployment rates are declining, meaning that more people should be able to afford buying a home.

According to Dr. Bernanke, the interest rates should not be modified at least until 2014 or 2015. This means that the housing market outlook will likely be stable until then.

One indirect way to invest in the housing market is by investing in home improvement stores. Every new house needs some modification to fit its owners’ custom needs. As more people return to work, home improvements can be made on existing houses as well. In most cases, people go and buy from the usual suspects–The Home Depot, Inc. (NYSE:HD) or Lowe’s Companies, Inc. (NYSE:LOW).

Home Depot

The Home Depot, Inc. (NYSE:HD) is the biggest home improvement store in the United States. The company’s sales for the first quarter of 2013 were $19.1 billion, up 7.4% from last year. Sales rose across the country, though they rose more significantly in California. Sales in Canada and Mexico also rose significantly.

According to the California Association of Realtors (C.A.R.), the housing market is expected to improve during 2013. New home sales are expected to increase 1.3% to reach 530,000 units. Also, the statewide median home price is forecast to increase 5.7% to $335,000 in 2013. As the presence of The Home Depot, Inc. (NYSE:HD) in California is strong, the retailer should see increased revenues due to improving market conditions.

We could expect even higher revenues in the interim because the company is being favored by professional customers again. According to The Home Depot, Inc. (NYSE:HD), the professional segment outpaced the growth rate in the consumer segment for the first time since 2008. Home builders are likely to bring huge revenues to Home Depot, and its net income should increase sharply as a result.

The Home Depot, Inc. (NYSE:HD)The Home Depot, Inc. (NYSE:HD) also provides capital to its investors in the form of a dividend offer. Investors receive $0.39 per share each quarter, corresponding to a payout ratio of 41%. The dividend payment was hiked in the first quarter of 2013 by 34%, and has been constantly increasing since its inception. As the housing market continues to improve, the increasing net income of Home Depot should allow the company to continue its aggressive dividend increase policy.

Lastly, the company’s earnings-per-share are expected to rise by 14% over the next five years.

Lowe’s

By delving into Lowe’s Companies, Inc. (NYSE:LOW) latest quarterly earnings report, the company appears to be strong. Its net sales declined from $11.6 billion in the fourth quarter of 2011 to $11.0 in the fourth quarter of 2012. It’s worth noting, however, that the fourth quarter of 2011 had an extra week compared to its 2012 counterpart. Lowe’s is picking up in its revenues and its net income, and a solid balance sheet allowed for a dividend hike from $0.14 to $0.16 per share.

Apart from the dividend offer, investors receive capital appreciation by a share repurchase program implemented by the company. The company repurchased $750 million or 21.3 million shares of stock. For the 2012 fiscal year, the company repurchased 146 million shares. Furthermore, the board of directors has authorized the repurchase of up to $5 billion of the company’s common stock. This should sit well with investors as their investment is likely to grow as a result.

From a valuation point of view, the company’s consensus for the 2013 fiscal year is $2.09, 19% higher than last year. The 2014 fiscal year is estimated to be 21% higher than 2013 as well. The company’s annual growth for the next five years is estimated at 17.5%.

Lowe’s Companies, Inc. (NYSE:LOW) is trading with a price-to-earnings ratio of 25.23, while The Home Depot, Inc. (NYSE:HD) is trading with a P/E of 26.15. However, Lowe’s price/earnings-to-growth ratio is 1.48, while Home Depot’s is 1.76.

Another investment option

I would like to mention another very profitable way to invest in the housing market. Most houses in the United States are built using lumber, and Lumber Liquidators Holdings Inc (NYSE:LL) should be considered as a long position.

The company sells hardwood flooring products at amazingly low prices. Its net sales increased by 22% in the first quarter of 2013 while its net income increased 92% to $15.8 million, or $0.57 per share. As a result, the company raised its full-year outlook. The net cash provided by operating activities rose from $10.3 million to $11.06 million. The company also plans to open between 25 and 35 new stores nationwide.

Although the company does not offer a dividend payment to its shareholders, I would expect one soon given the company’s solid balance sheet and current market outlook.

In my opinion, Lumber Liquidators should see brighter days in the future. The market outlook is extraordinary, and the company will likely benefit from increasing new homes orders from home builders. Investing in this company is advisable as a way to take advantage of the great housing market outlook.

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