Toll Brothers Inc (TOL), The Home Depot, Inc. (HD): Invest in Housing Without Breaking the Bank

Home improvement stores offer exposure to the housing market, without some of the headaches of investing in volatile home builders.

Overall The Home Depot, Inc. (NYSE:HD) looks like a better investment than Lowe’s Companies, Inc. (NYSE:LOW). Both companies sell home improvement products in similar markets to similar demographics. The firms are similarly valued with a price to earnings (P/E) ratio around 25.

The Home Depot, Inc. (NYSE:HD) recognizes that the days of insane housing growth are over.

It is looking to make its operations more efficient and boost its return on invested capital invested (ROIC) to 24% by 2015. Lowe’s 2015 ROIC goal of 16.8% is substantially lower than The Home Depot, Inc. (NYSE:HD)‘s. Home Depot’s ROI of 16.6% and profit margin of 6.1% are significantly higher than Lowe’s ROI of 8.6% and profit margin of 3.9%. These numbers show that The Home Depot, Inc. (NYSE:HD) is better at turning capital into profits.

Conclusion

America’s housing market is coming back and more consumers have disposable income to renovate or buy a new home. This rebound is built on low interest rates and investors should be careful. Home builders are stuck in a very volatile business, and low interest rates only make the situation more dangerous.

Home improvement companies like The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW) offer a safer way to play the rebound. Their revenues and profits are not as volatile as home builders’ revenues and profits. The Home Depot, Inc. (NYSE:HD) is the better option as it runs a more efficient operation than Lowe’s Companies, Inc. (NYSE:LOW). If The Home Depot, Inc. (NYSE:HD)’s valuation decreases then it is definitely worth a second look.

The article Invest in Housing Without Breaking the Bank originally appeared on Fool.com is written by Joshua Bondy.

Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lowe’s. Joshua is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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