The Home Depot, Inc. (HD), Lowe’s Companies, Inc. (LOW), Bed Bath & Beyond Inc. (BBBY): Is This Duopoly Still an Attractive Buy?

In addition, market saturation will likely cause an increased focus on price competition — rather than store expansion — as a means to grow earnings. Ongoing price competition is inevitable, despite the de facto duopoly, because of the lack of product differentiation. Home Depot and Lowe’s derive a competitive advantage from cost efficiencies, but must continue to compete with one another based on price. This places a permanent cap on margin expansion.

So it looks as though the current environment is as good as it is going to get in the medium term, which means investors who buy Lowe’s or Home Depot can expect a low return going forward.

A better alternative

Instead of buying overpriced home-improvement retailers, investors should consider buying Bed Bath & Beyond Inc. (NASDAQ:BBBY), a reasonably priced home-furnishings retailer. Bed Bath & Beyond Inc. (NASDAQ:BBBY) benefits from a rising housing market because consumer expenditures on household items also rise, but the company’s merchandise is weighted toward recession-resistant items — like towels and cookware — that consumers keep buying even during a sharp recession.

The company’s protection from downturns in the housing market is evidenced by its continued revenue growth even during the recession; while The Home Depot, Inc. (NYSE:HD) and Lowe’s suffered revenue declines, Bed Bath & Beyond Inc. (NASDAQ:BBBY) grew revenue by 6.5% and 2% in 2008 and 2009, respectively. In addition, the company routinely earns over 20% return on equity, despite having no debt on the balance sheet.

Bed Bath & Beyond Inc. (NASDAQ:BBBY) is conservative, highly profitable, and selling at a reasonable 16 times earnings. Investors who want to bet on the housing recovery should buy Bed Bath & Beyond Inc. (NASDAQ:BBBY) and wait for Lowe’s and Home Depot to get cheaper.

The article Is This Duopoly Still an Attractive Buy? originally appeared on Fool.com and is written by Ted Cooper.

Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond, Home Depot, and Lowe’s.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.