Back in May, real estate website operator Zillow Inc (NASDAQ:Z) raised its revenue forecast for the year. The company also saw a big boost in subscriptions, with revenue from its marketplace business (which includes not only subscriptions by agents but also advertising by mortgage lenders) jumping 87% to $31 million. The marketplace business attributed three-fourths of the company’s revenue in 2012, so seeing it jump significantly was a good sign.
At the same time, The Home Depot, Inc. (NYSE:HD) was also firing on all cylinders, with the housing recovery contributing to the company’s 18% increase in net income for the first quarter. Besides topping earnings estimates, the planet’s largest home improvement store also raised its full-year outlook for both revenue and earnings, anticipating that the good times would keep rolling in.
Will the good times continue?
But then came the Fed announcing that the tapering of QE may come a little sooner than expected. The threat of the Goldilocks economy evaporating and taking QE with it caused a drop in stock prices and fears that the housing recovery would go south because of increasing rates.
While some think low rates will disappear and destroy the prospect of housing sustaining its positive momentum, others think that higher rates won’t slow a resilient housing recovery.
While the argument (or noise) continues as to whether the Fed will allow rates to rise, and/or if rates will or will not kill the housing recovery, Zillow Inc (NASDAQ:Z) has one thing to say. According to a recent Zillow Digs Summer Home Improvement Trend and Spending Survey, 60% of homeowners plan to make a home improvement or addition this summer.
The home improvement trend…
Homeowners improving their places this summer should benefit Home Depot, as well as its competitor and second-largest home improvement store, Lowe’s Companies, Inc. (NYSE:LOW).
Unlike The Home Depot, Inc. (NYSE:HD), when Lowe’s last reported earnings in late May it failed to meet expectations, with earnings increasing by only 3%. Besides suffering from a lack of presence in the lucrative California market, the company also blamed the rainy weather, with CEO Robert Niblock saying
“Temperatures were cooler and precipitation greater than normal for much of the quarter resulting in a delayed spring selling season.”
Lowe’s Companies, Inc. (NYSE:LOW) needs to bump up its earnings, and a trend in home improvement may benefit the company even more than it would Home Depot– at least in the eyes of analysts. Under-penetration of the California market may still pose a problem, however. Luckily for Lowe’s, it may have a solution to this problem.
If you can’t beat them, buy out a competitor to better compete with them…
While Lowe’s lagged significantly behind Home Depot last quarter, it is now looking to patch up its weaknesses by acquiring the majority of Orchard Supply Hardware Stores Corp (OTCMKTS:OSHWQ). An acquisition would be very lucrative for Lowe’s, as explained by the company’s CEO, who stated
“Strategically, the acquisition will provide us with immediate access to Orchard’s high density, prime locations in attractive markets in California, where Lowe’s (NYSE:LOW) is currently under-penetrated, and will enable us to participate more fully in California’s economic recovery.”