Home Depot vs. Lowe's
I would invest in Lowe's over Home Depot. Over the past five years, both firms have undertaken aggressive expansion. However, the more measured pace of Lowe's expansion has allowed them to steadily improve their financial position. Conversely, Home Depot has just in the past year added a significant amount of leverage in order to finance their growth. Given that Lowe's has been able to successfully expand parallel to Home Depot, I do not see any first mover advantages that would justify the premium Home Depot has put on its growth in taking on such debt. This sentiment is backed up by the deterioration of Home Depot's interest coverage ratio. Five years ago, HD had almost no debt. But since it began to take on debt, it has seen its ability to cover those payments drop dramatically with each passing year. While the present interest coverage ratio is not alarming in and of itself, the trend exhibited is. Lowe's, on the other hand, has been able to slowly improve its coverage ratio, to the point where it now has a stronger ability to meet its obligations than does Home Depot.Aside from these aspects, the two firms are remarkably similar. Both have managed to maintain a course of expansion that has tak
With all the similarities between the two firms, the steadier, more conservative growth pattern and stronger financial measures would convince me to invest in Lowe's instead of Home Depot. I like them for short-term credit as well. Both firms have increased their earnings-per-share steadily over the past five years. This may reflect a better inventory mix in their stores. Lowe's operation is slightly more efficient, however, since they have registered a steady increase in profit margin, while Home Depot's margin is bit more erratic, which shows they have less control over their profit margin. Combined with the lower average ticket, it suggest perhaps that Home Depot carries less low-volume, high-end merchandise than does Lowe's. en them across the United States and into international markets. That slight bit of differentiation in their product line is not a concern in terms of issuing credit, even though it makes them slightly less desirable in a head-to-head comparison with Home Depot. This gives me cause to believe that they will do more with the credit that I would potentially extend to them. The consistent improvement in their financial position impresses me, and their more conservative approach to growth makes them a better proposition for the extension of long-term credit. Prior to the evaluation period, Lowe's carried credit but has, over the course of the past five years, worked to whittle down their debt level. Long-Term Credit EvaluationMuch of the same criteria used to evaluate a potential equity position would be used to evaluate long-term credit decisions. One point that comes in strongly in favor of Lowe's is that they have traditionally carried more debt than has Home Depot. Even if you treat the past year, where Lowe's finally had a better interest coverage ratio than Home Depot, as an aberration, the general trend towards better ability to cover their long-term debts stands Lowe's in good stead. Home Depot in the past year added a significant amount of debt, which lowered their interest coverage significantly, so that for the first time in the five-year evaluation period they had a lower rate of interest coverage than did Lowe's.
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