In this episode of The fiveMotley Fool contributors Jason Hall, Auri Hughes and Taylor Carmichael discuss their favorite rebuild stocks. Jason Hall compares mega-caps Home deposit (NYSE: HD) and Lowe’s (NYSE: LOW), and suggests that one of these stocks is stronger than the other.
This discussion was recorded live on August 31.
Jason Hall: I’m going to endorse Taylor’s comments on Home Depot and Lowe’s, and I really wanted to focus on the desirability of the big picture because I think it’s easy with these companies because of their size. Already, they are like the duopoly of mega home improvement retailers in the United States. But I think it’s easy to miss how much of an opportunity there remains for these two companies, and in particular I’m going to be focusing on Home Depot here because I really think it’s in the best position if you think about it. to the economics of the business, if you think about the long-term performance profiles Home Depot has been able to consistently capture. It’s just such a wonderful, compelling business. The three legs of the stool for me for Home Depot, number 1, and that’s something he shares with Lowe’s, and that’s just the power of his logistics engine. Because they are so close to so many owners and so many users, already end users. It’s just a huge gap. I think it’s a bit of a lasting ditch too because the cost of entry is substantial for another business to try to get into that same business. It would just be reckless to try to add a third major competitor here, and that’s why you don’t see private equity going after it. It’s not something that I think there is going to be a great appetite for anyone to try and do. It’s just a mighty ditch. The other two aspects are linked to major housing trends. The first is the age of the housing stock in the United States, the average American home is around 38 years old. It’s old. There are a lot of houses that need a lot of work. You think of the inventory status of existing family homes, it’s like half of what it normally is. Existing single family homes for sale are about half of what they usually are. It’s a little over a million. It’s normally about two million at a time. Thinking of the massive demand to buy homes? There is not enough housing and it will take forever for builders to catch up. This means that there will be a lot of money that is going to be spent on existing homes to bring them up to standard, improve them, add the features that people want to have, make them safer for the baby boomers who are retiring. on the spot, make their homes look better, lighting and railings, just things like that to make them safer. All of these things are absolutely in The Home Depot’s favor to continue to do well. Oh, by the way, a ton of people figured out after this DIY project, they have to hire a contractor to do it, and there isn’t a home improvement retailer that has better relationships and does better. business with renovation professionals as Home Depot. I think you add all of those things together and these are the three pillars that this business is built on. I think even on its scale it can be a business that beats the market in the long run. I really believe it is. To like.
Taylor Carmichael: Jason, I always thought Home Depot was immune to Amazon (NASDAQ: AMZN), unlike Walmart, that their market is not going to be taken, has not been taken by Amazon. I think about Carvana and their ability to sell something that you wouldn’t think you could sell online, cars, and I wonder, can they ever be compromised by an internet competitor? I’m sure they’ve thought about it. And do they do a lot of business through their website? Do they happen that way?
Jason Hall: Taylor I’m glad you asked that question, because it’s actually one of the things that has become a real strength for The Home Depot, and it’s something that they started to focus on a few years ago. years is really to build a really solid e-commerce experience. It’s part of the omni-channel to really leverage all of their assets. Again, because this is a business that already has a store within 20 miles of 90 percent of Americans, I can’t remember the exact statistic –
Taylor Carmichael: Wow.
Jason Hall: – but the vast majority of us live within a gallon of gasoline from a Home Depot. We are all very close to Home Depot. What that means is that if you’re a DIY enthusiast, have a plumbing problem, want to do some weekend projects, there’s a Home Depot you can walk to in under 20 minutes. , less than half an hour. You want to order it online, you can order it online, and you can go to the store to pick it up. If you want to have it delivered to your place, they already have the last mile logistics there, they are already very close to the customers. It is a huge lever. While Amazon and so many other ecommerce companies have to build the last mile. Home Depot is already there.
Taylor Carmichael: They already have the warehouses. They understood them well, didn’t they. The warehouse is their business.
Jason Hall: It’s their business and they’ve leveraged their physical footprint and built amazing technology to help operate it. If you take a look, let me do it here real quick, I’ll be sharing a screen share here, and it really highlights why I prefer Home Depot over Lowe’s. I will divide this by metric. You look at Home Depot’s return on investment, and you look at its return on assets, it’s a dramatically high return business. You wouldn’t necessarily think of this for a big box retailer, as these are often the companies for which margins can seem slim and hard to come by, but they turn their inventory so quickly that they are able to generate incredible returns. on their invested capital and on the assets they already have in place. It’s just an amazing business.
Taylor Carmichael: Jason, how tall are they now? I know they’re a mega-cap, flippant I don’t know what their market is –
Jason Hall: Market capitalization?
Taylor Carmichael: Over $ 100 billion, right?
Auri Hughes: $ 345 billion, Home Depot.
Jason Hall: Yes, it’s more than double the size of Lowe’s. Lowe’s costs around $ 140, so around $ 345, yes.
Taylor Carmichael: Wow, and then my other question, do you think they’ll hit a trillion? Looks like they will eventually do it.
Jason Hall: Finally, yes. Here’s the thing, I think you have a dividend yield, it’s modest, but pretty good and great history of dividend growth. I think in terms of total return. Besides, this is also a share buyback target, we took that free cash flow, invested a modest amount in the business if needed, return the rest to investors as dividends and buybacks . Really hit a trillion dollars. I think it’s like a 15-20 year old thing. In terms of increasing per share value, dividends and share buybacks mean that it doesn’t have to be a trillion dollar company to still be a 3x, 6x investment over the years. Next 5-10 years.
Taylor Carmichael: Costs.
Jason Hall: Auri, any opinions on this space?
Auri Hughes: No, it’s really interesting. I would like this because the dividend game is very secure. The dividend payout ratio, when I looked at it, was around 50 percent. They’re basically signaling that there’s a lot of money that they don’t need. I think it’s a good game for securing your wealth and playing on the economy and just a staple of American business, basically.
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