The COVID-19 pandemic in FY2020 and FY2021 led to the equivalent of six years of revenue growth for Home Depot, Inc (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW† The valuations are also steady rose over the past five years, showing its growing importance as a staple, while other pandemic stocks have fallen after reopening. In addition, given Home Depot and Lowe’s stable dividend yields, long-term investors are well insulated against ongoing inflation and rising interest rates.
Given their growth trajectories, investors can rest assured that they will buy and forget about both stocks for the next five years.
The pandemic pushed forward six-year revenue growth
Home Depot Sales, Net Income, and Net Income Margin
Pre-COVID19 pandemic, Home Depot grew its revenues at a CAGR of 5.23% since FY2016. Over the past two years, however, the company’s revenues grew at an impressive rate at a CAGR of 17.1%, with revenue of $132.11 Billion in FY2020 with 19.8% YoY growth and $151.15B in FY2021 with 14.4% YoY growth. As a result, net income has also grown exponentially over the past two years, from $11.2 billion in FY2019 to $16.4 billion in FY2021, with a relatively stable net income margin in the 10% range. In addition, Home Depot has generated impressive free cash flows with $14.01 billion in FY2021 in free cash flow over the past two years, despite massive long-term debt of $33.57 billion. However, FCF margins declined slightly, given the increasing investments in its supply chain networks, namely: by chartering its own vessels to address bottlenecks in ports during the year-end 2021.
Home Depot FCF, Long Term Debt and FCF Margin
Lowe’s Sales, Net Income, and Net Income Margin
On the other hand, Lowe’s revenue growth was at a CAGR of 3.53% from FY2016 to FY2019, improving to 15.51% over the past two years during the COVID-19 pandemic. Net income also doubled from FY2019 to $8.44 billion in FY2021, while net income margins improved from 5.9% in FY2019 to 8.8% in FY2021. Similarly, Lowe’s also generated a robust FCF of $8.26 billion in FY2021, albeit with increasing long-term debt worth $23.32 billion. As with Home Depot, margins also declined slightly in FY2021, as the company continues to invest in its supply chain networks amid global shortages, through regional and flatbed distribution centers and last-mile delivery capabilities.
Lowe’s FCF, Long-Term Debt and FCF Margin
Home Depot and Lowe’s revenue growth was primarily attributed to the proliferation of DIY home improvement projects during the US COVID-19 pandemic lockdowns. In addition, the pandemic has led to an increase in demand for homes in the US despite limited supply and consequently to a price increase of 111% in the first quarter from 20 to 130.5% in the fourth quarter of 21, due to multiple reasons, including major stimulus measures, low mortgage rates, and remote working trends.
Since the US accounted for over 90% of Home Depot and Lowe’s revenue segment, we believe their future growth will be somewhat isolated from the ongoing war in Ukraine, although there may still be some headwinds from global problems with the supply chain, rising transportation and labor costs and a slowing US housing market.
Is it still a buy for dividend investors?
Home Depot and Lowe’s Stock Dividend Yield and Share Price
Despite the recent market correction, we should also note that Home Depot and Lowe stocks have seen an observable upward trend over the past five years, at 232% and 270% respectively, comparable to many base stocks, such as Costco (COST), Walmart (WMT) and CVS (CFS). By contrast, many high-growth pandemic stocks, such as Airbnb (ABNB), Netflix (NFLX), and Teladoc (TDOC), had plummeted to their pre-pandemic prices. In addition, both Home Depot and Lowe’s have maintained relatively stable dividend yields over the past five years. As a result, they seem very attractive to long-term investors looking for stable, inflation-proof stocks.
Home Depot and Lowe’s Shares Outstanding
Nevertheless, if we had to pick just one, we think Lowe’s would be a better buy, given its 64.4% stock price return over the past five years, although Home Depot is also doing well at 29%. Given that both companies have engaged in aggressive stock repurchase programs over the past five years, long-term investors at Home Depot and Lowe’s would have seen the value of their shares rise 14.3% and 23.9%, respectively, over the past five years. † It is clear that both companies have performed very well.
So, is Home Depot and Lowe’s stock a sale?sell or hold?
Home Depot and Lowe .’s Expected Earnings
Home Depot is expected to grow its revenues at a CAGR of 3.06% over the next five years, while reporting FY2022 revenue of $153.96 billion, representing a 1.8% year-over-year increase. Despite the normalization of revenue growth going forward, the company is still expected to report impressive net income of $16.53 billion in FY2022, in line with FY2021 levels. On the other hand, Lowe’s is expected to report revenue growth at a CAGR of 2.85% over the next five years. For FY2022, the consensus estimates that the company will report revenue of $98.21 billion and net income of $8.7 billion, representing a year-over-year increase of 2% and 3%, respectively.
Home Depot is currently trading at EV/NTM earnings of 2.3x, in line with the 3Y average of 2.56x. The stock is also trading attractively at $300.21 on April 18, 2022, near its 52-week low of $293.59 and down 40% from its 1Y high of $416.18. Similarly, Lowe’s is trading in line with its 3Y average of 1.63x, at $197.72 on April 18, 2022. The stock is also down 33.1% from its 52-week high of $261.38 in Dec 2021.
therefore, we rate Home Depot and Lowe’s stock as a buy.