This paper is an equity analysis paper about the home improvement store industry. The top five companies in the industry by market cap are evaluated and there is a determination of which one of these companies is the best one in which to invest. That company ends up being Home Depot.
Equity Analysis
The industry that I have chosen is the Home Improvement Store industry. The five largest companies in this space are Home Depot, Lowe's, Lumber Liquidators, Builders FirstSource and Orchard Supply Hardware. The largest two of these by market cap account for most of the industry's total market cap. Both Home Depot and Lowe's are mass market retailers with a cost leadership strategy and national scope.
Home Depot has a share price of $60.96. It has the broadest geographic scope because of a small number of international operations (Canada, Puerto Rico). Home Depot's revenue is increasing steadily, as is its net income. Those are encouraging signs, because investors need to see future growth potential. All firms in the industry have their growth potential tied to the housing market, and Home Depot is predicting a slow recovery in that market over the next couple of years (Skariachan, 2012). Home Depot is solvent, has a healthy level of debt, and is strategically well-positioned to take advantage of this improvement in the housing market. The company's stock, however, is trading near the high of the 52-week range and carries with it a P/E of 21.91. This implies that for the most part, a minor recovery in the housing market has already been priced into Home Depot stock.
The other major company in the industry, also with a nationwide scope and cost leadership position, is Lowe's. Lowe's stock is currently trading at $31.47, which gives the company a P/E of 21.09. This price is also near to the 52-week high. Lowe's income statement reveals that it has lower revenues than Home Depot, and has slower revenue growth. The company's net income is also growing more slowly than that of Home Depot. Lowe's has a similar balance sheet structure to Home Depot. However, given that their stock performance is almost exactly the same and Home Depot has better trends in its income statement, Home Depot has a slight advantage between the two major firms in the industry.
There are three other firms in the industry as well, however, not counting foreign companies that Yahoo lists. Lumber Liquidators occupies a specialist position in the market, focused on flooring. It has a price of $55.21, which gives it a P/E of 37.33. With a beta of 1.35, however, it is also a riskier stock than Home Depot, which has a beta of 1.03. The 52-week high for Lumber Liquidators is $58.80, so again the current trading level is just below that of its highs for the year. The income statement of Lumber Liquidators reveals that the company's revenues are increasing, but its net income has flatlined. This lack of net income growth indicates that the company has seen its operating costs rise faster than its revenues, which from an operational perspective is not a good sign. The firm's balance sheet, however, is very healthy, with great liquidity and no long-term debt.
The fourth largest company in the industry by market cap is Builders FirstSource. This company has a stock price of $5.31. It has no P/E, since it is losing money. The company is focused on products for residential construction in the southern and eastern states, so the housing recovery needs to be in those regions for this company to benefit. The consistent losing of money, however, makes this company a risky investment, as does the high level of long-term debt. The beta is 2.3, which is highly volatile.
The fifth-largest company by market cap is Orchard Supply Hardware Stores, which is a California-based competitor to Home Depot and Lowe's. Its stock is priced at $10.11. The company lost $8.08 per share last year and is on a downward trend in revenue, gross income, operating income and net profit. This company is moving in entirely the wrong direction.
Overall, the best buy in this category is Home Depot. The stock price is relatively high, but that is the case for the top three firms in the industry. The bottom two are losing money and are on a downward trend. Home Depot has the best strategic position of the top three firms, while Lumber Liquidators has the best balance sheet. However, the superior diversification both of product lines and geography, along with the strategic advantages that go with being the largest company in a cost leadership category, make Home Depot a better buy than either of its two competitors.
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