Last quarter’s California issue? Instantly resolved if everything goes to plan. And that’s not all. The acquisition would also allow Lowe’s Companies, Inc. (NYSE:LOW) to sell Craftsman and Kenmore products. According to the Los Angeles Times, under the current acquisition agreement Orchard Supply Hardware stores would continue operating its stores as a standalone business while also retaining its management team and employees.
Lowe’s is set to serve as a “Stalking Horse Bidder” and will make its offer at the auction that will occur after Orchard files for Chapter 11 bankruptcy. While other buyers can top Lowe’s current price tag if they offer a minimum of $12 million more than Lowe’s offer, worst case scenario Lowe’s gets a 3% break-up fee. With the exception of only two stores, all of Orchard’s 91 store locations are located in California. This is why the buyout by Lowe’s Companies, Inc. (NYSE:LOW) makes great sense for both companies.
If Lowe’s $205 million offer does become reality, the company should easily be able to pull the acquisition off without suffering any immediate negative financial repercussions, especially when considering that it has about $1.2 billion in cash on its books.
Valuations
| P/E | Forward P/E | Dividend (Yield) | Market Cap (Billions) | |
|---|---|---|---|---|
| HD | 23.43 | 17.33 | $1.56 (2.10%) | $107.84 |
| LOW | 22.64 | 15.63 | $0.72 (1.80%) | $42.41 |
Data provided by Yahoo! Finance 06/23/2013
While the much-smaller Lowe’s is cheaper than Home Depot, it also offers investors less in the dividend department. Looking closer, It also appears that paying more for Home Depot is paying more for a good reason:
The Home Depot, Inc. (NYSE:HD)’s earnings growth looks impressive, especially when compared to that of Lowe’s Companies, Inc. (NYSE:LOW), which managed to grow revenue more than its larger competitor but not capitalize from it as efficiently.
The bottom line
While the argument over the effects of tapering on housing will likely continue, existing homeowners spicing up their homes may be a realistic positive trend to expect that will benefit home-improvement stores. With 37% of homeowners deciding to find their home-improvement designs online, Zillow Inc (NASDAQ:Z) will also benefit as its Zillow Digs is the third most common online source with a growing presence.
While Zillow Inc (NASDAQ:Z) as a newer company is currently rather light on earnings, heavy revenue growth is a good sign for the future of a fast grower that is still establishing itself. Zillow’s display advertising revenue was up over 27% in the most recent quarter, with an encouraging 55% of total revenue coming from mobile devices. Zillow is still in the process of establishing its moat as the premier online real estate website, and huge jumps in revenue and market share mean more staying power when earnings finally begin rolling in. An investor that is patient enough to wait for these future earnings may be rewarded nicely, as Zillow Inc (NASDAQ:Z) may become quite a play on housing.
According to the company, 93 homes were viewed each second on mobile devices during its first quarter– a whopping 63% increase year-over-year. Zillow is clearly heading toward its goal not only as the go-to site for those looking to find a home, improve their home, or just find real estate-based information, but it is also seamlessly growing its business in the lucrative mobile market as well.
The Home Depot, Inc. (NYSE:HD) has already been capitalizing quite nicely from a recovery in housing, coming close to tripling sales of big-ticket items (anything over $900) and merchandise over its last three consecutive quarters. Despite only adding around 12 new stores since 2008, the company has managed to increase earnings by over 35%, largely because of its ability to improve its operating margins and lower store costs. Many of the big-ticket items the company has been selling are a direct result of people improving their homes, according to Brian Gilmartin, portfolio manager at Trinity Asset Management, cited in reports.
The trend predicted by Zillow Inc (NASDAQ:Z) of a continual increase in the number of home improvement projects by homeowners throughout the summer should also help to continue to increase The Home Depot, Inc. (NYSE:HD)’s earnings.
While The Home Depot, Inc. (NYSE:HD) currently looks like the clear winner of the two home improvement stores, if Lowe’s can absorb Orchard and get its foot inside of the California market, then the tide might turn and the smaller company may be poised for big growth. Some $205 million paid out of a $1.2 billion cash pile shouldn’t put a drag on the company’s short-term financial health to invest in long-term growth, either. Orchard is a game changer for Lowe’s.
Invest in Lowe’s for its potential growth and increased earnings potential resulting from an acquisition of Orchard, or pick Home Depot for an established and safer bet to ride the summer uptick in home improvement.
Joseph Harry has no position in any stocks mentioned. The Motley Fool recommends Home Depot, Lowe’s, and Zillow. The Motley Fool owns shares of Zillow.
The article Summer Home Improvements Will Bode Well for These 2 Stocks originally appeared on Fool.com.
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