Earnings

Dissecting the Numbers for The Home Depot, Inc. (HD) and Lumber Liquidators Holdings, Inc. (LL)

The Home Depot, Inc. (NYSE:HD) shares are up more than 36.37% this year and recently decreased -1.24% or -$2.28 to settle at $180.57. Lumber Liquidators Holdings, Inc. (NYSE:LL), on the other hand, is up 86.40% year to date as of 12/05/2017. It currently trades at $29.35 and has returned 5.12% during the past week.

The Home Depot, Inc. (NYSE:HD) and Lumber Liquidators Holdings, Inc. (NYSE:LL) are the two most active stocks in the Home Improvement Stores industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect HD to grow earnings at a 12.99% annual rate over the next 5 years. Comparatively, LL is expected to grow at a 30.00% annual rate. All else equal, LL’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. The Home Depot, Inc. (HD) has an EBITDA margin of 16.64%. This suggests that HD underlying business is more profitable HD’s ROI is 31.80% while LL has a ROI of -25.10%. The interpretation is that HD’s business generates a higher return on investment than LL’s.

Cash Flow 




The value of a stock is simply the present value of its future free cash flows. HD’s free cash flow (“FCF”) per share for the trailing twelve months was +0.28. Comparatively, LL’s free cash flow per share was +1.28. On a percent-of-sales basis, HD’s free cash flow was 0.35% while LL converted 0% of its revenues into cash flow. This means that, for a given level of sales, HD is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. HD has a current ratio of 1.20 compared to 1.80 for LL. This means that LL can more easily cover its most immediate liabilities over the next twelve months. HD’s debt-to-equity ratio is 10.06 versus a D/E of 0.17 for LL. HD is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

HD trades at a forward P/E of 21.70, a P/B of 83.88, and a P/S of 2.15, compared to a forward P/E of 40.19, a P/B of 4.31, and a P/S of 0.82 for LL. HD is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. HD is currently priced at a 0.06% to its one-year price target of 180.47. Comparatively, LL is -7.5% relative to its price target of 31.73. This suggests that LL is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.90 for HD and 2.80 for LL, which implies that analysts are more bullish on the outlook for LL.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. HD has a beta of 1.11 and LL’s beta is 2.07. HD’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.HD has a short ratio of 2.63 compared to a short interest of 4.05 for LL. This implies that the market is currently less bearish on the outlook for HD.

Summary

Lumber Liquidators Holdings, Inc. (NYSE:LL) beats The Home Depot, Inc. (NYSE:HD) on a total of 7 of the 14 factors compared between the two stocks. LL is more profitable, has higher cash flow per share, higher liquidity and has lower financial risk. In terms of valuation, LL is the cheaper of the two stocks on book value and sales basis, LL is more undervalued relative to its price target. Finally, THC has better sentiment signals based on short interest.

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