Monday, August 1, 2011

Lowe's and Home Depot

This Michael Santoli article in Barron's compares Home Depot (HD) to Lowe's (LOW) and points out the former has a premium valuation that doesn't seem justified.

As the two leading home improvement retailers, both companies have and are likely to at least maintain a respectable economic moat. The article points out that Lowe's should generate enough cash to be able to repurchase roughly half of its market capitalization in five years or so.

Very shareholder-friendly.

Something that I highlighted in this previous post:

Lowe's Shareholder-Friendly Buyback Plan

This article points out Lowe's plans to buy back $ 18 billion of its shares. That would more than half its shares outstanding near current prices.

At current prices and with a longer-term investing time horizon I'd expect solid returns from owning Lowe's shares. The buyback plan makes that even more likely. Their business has performed just fine in a very weak economic environment for U.S. housing. They are almost certain to do an awful lot better once the housing situation improves.

Yet, the current environment may persist for quite a while yet. How long is difficult to judge. With a U.S. housing market that is likely to be weak for an extended period, I wouldn't necessarily expect much from Lowe's stock in the short-to-intermediate run.

I'm not in the business of trying to time the turn in economic conditions. If the price of an asset seems right compared to likely future long-term prospects I don't wait to accumulate shares. That's a recipe for owning too few shares of something. Waiting makes little sense if you understand the business and you've judged long-term prospects reasonably well.

Of course, if the judgment on future prospects is off returns will suffer. So the focus, as always, is not on whether the shares will be "dead money" for one or even three years. It's on whether the competitive advantages of Lowe's allow the company to at least maintain or, even better, widen the economic moat that it has.

During the difficult times the leaders within an industry are often able to do just that.

Otherwise, the so-called dead money that some investors seem to fear so much is just a chance to accumulate more shares in a good business while it is cheap.

It's also an opportunity for the company to use its cash flow to do the same potentially enhancing returns for long-term holders.

Adam

Long position in Lowe's
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