As Hurricane Sandy ripped across the East Coast yesterday, leaving behind a trail of damaged homes and wrecked commercial space, the rebuilding process should to be long and vast. As a result, major home improvement retailers like The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW) should benefit from a surge in materials purchases as individuals and companies embark on the rebuilding process over the next few months.
Even without the upcoming surge in sales due to Hurricane Sandy, Home Depot is expected to grow revenue 4.6% this year. The increase comes from a net addition of ten stores and international store openings. Lowe’s is also expected to open a net ten stores, but saw its fiscal year 2012 comp sales come in flat. Being the leaders in building materials and home improvement, both companies are expected to grow EPS at 15% annually over the next five years, and both companies pay a dividend that yields around 2%. The big headwind for the companies will be a potential longer than expected recovery in the housing market. Yet low interest rates should help support home remodeling efforts over the long term; see our previous Lowe’s v. Home Depot battle analysis.
Other key companies that could see sales benefits as individuals look to recover from Hurricane Sandy are Target Corporation (NYSE:TGT), Wal-Mart Stores, Inc. (NYSE:WMT) and Lumber Liquidators Holdings Inc (NYSE:LL).
We see Target’s initiatives to adapt to a changing consumer preference as positives for the long term growth prospects of the company. This includes selling off its $5.9 billion credit receivables portfolio to TD Bank. The company’s same store sales continue to grow, up 2.1% in September, and its food sales grew the fastest of all the segments. The company’s remodeling of stores and introduction of its PFresh format, which adds fresh foods to Target stores, have increased the frequency of customer visits quite significantly.
We see Wal-Mart’s stock as cheaper and safer than bonds at this point. Revenues are expected to be up 5.5% in 2012, driven by international growth of 8%. The company is also continuing to grow store count and global square footage, expected to be up 3.6% this year. The company’s diverse product mix and vast geographical coverage has allowed it to outperform year to date, up 25%.
Lumber Liquidators trades at a P/E of 35x, a bit high on a peer basis, but in line for the company on historical P/E basis. The company recently posted 3Q EPS that beat consensus estimates handily, by over 30%. The company also increased EPS guidance for 2012 to $1.53-$1.59, from previous guidance of $1.30-$1.42. Lumber Liquidators should get a further boost from the upcoming surge in re-construction from the damage caused by Hurricane Sandy. Regardless, the company plans to open 23-25 new stores and grow same-store sales in the mid- to high-single digits next year.
Looking at the top fund owners for both Home Depot and Lowe’s, the interest by funds was more prominent in Lowe’s. Home Depot saw its top fund owner Columbus Circle Investors dumping 20% of its 1Q stake, as well as its second largest fund owner, First Eagle Investment Management, dump 35%. Lowe’s, meanwhile, got votes of confidence from John Griffin and Partner Fund Management, upping their 1Q stakes 11% and 321% respectively; check out all the funds owning Lowe’s.
Although we believe that both companies will benefit from the upcoming surge in building materials purchases, Lowe’s wins the fund interest battle and also the valuation battle. Lowe’s and Home Depot trade neck-and-neck on a P/E basis, at 21x and 22x, respectively, yet Lowe’s trades at a big discount on a P/S basis. Lowe’s trades at a P/S of 0.7x, while Home Depot is at 1.3x. If we had to choose one, Lowe’s – one of the top ten service stocks loved by hedge funds – would be our top pick. Additionally, we are also intrigued by the potential benefits for Target and Wal-Mart and would be interested in owning either.