Tuesday, 08/26/08
Posted 08/26/08,  09:15 pm ET

(Scroll down to see Jim's comments below)

 
 
Today's date:  Tuesday, 08/26/08

  Dow Jones: 11,412   + 26
  NASDAQ:   2,361    -  3
  S&P 500:   1,271    + 4
 
 
 
 
 
First Segment
   
Opening Segment 1 Title: 'Home Schooling'

.  .  .  .  .

Featured Stock(s):

Home Depot (HD)
See HD's official investor relations' site here.
See the Yahoo! Finance profile for HD here.

and...

Lowe's
(LOW)
See LOW's official investor relations' site here.
See the Yahoo! Finance profile for LOW here.


See Opening Segment 2, below...

 
After this segment, you can see Jim's Lightning Round picks here...


Jim:   We've decided to do something new on Mad Money...  In case you missed our shows last week, because a couple of guys were hitting each other (i.e., Olympics boxing, et. al. that pre-empted Jim's 6pm show the last two weeks)...

We're teaching you how the professionals value stocks, so you can do it at home.  Yeah, it's D-I-Y time... 

We've been using head-to-head comparisons of companies in the same business...  to show you how professionals value each stock in relation to others in the overall market.

Today, I want to take steps...  I want to go further...  I want to talk to you about the concept of "key metrics"...   Let's translate that...  let's bust that Wall Street jibberish...

The Street uses different yardsticks to evaluate different kinds of stocks...  You see, when we're looking at a stock and comparing the two, you need to know which yardstick to use.  You can't just use, oh, how were the sales, and how were the earnings...  no.  Each industry has a particular metric that we all measure them by...

If we were talking retailers, you would want to look at what's known as "same store sales"... How did that store do last year versus this year?...  Why do we care about that?  Because, if you add a whole bunch of stores, and you just looked at total sales, it's misleading...  If you put up 100 (new) stores, you're numbers are obviously going to be better.

Now, that's the key metric for retail.  How about restaurants?... 

For restaurants, we want to figure out how much they can control their raw costs...  That's exactly what made us disrespect Burger King (BKC) last week.  We thought they wouldn't be able to control it.  It turned out to be a prescient call, because that was the metric that the Street cares about.

Now that we think housing is going to bottom in 309 days...  keep your eye on that countdown... maybe it's time to revisit the two titans of home improvement...

Lowe's (LOW) and the Home Depot (HD)...  which have already bounced 34% and 26% from their bottoms, respectively...  much like the housing charts that I showed you...

What we want to know is, first...  Should we buy either of these companies?...  And, second... looking at their key metrics, for their industry... retail... which of these two stocks is the better one to buy?...  And this is not an easy one, okay...  especially because you have to kind of anticipate that the housing situation might improve, as we are 309 days from now...

First off... We always start in the same place when we try to value stocks like a money manager... we use this 10-point scale... and that's with the sector. You must know where the sector is in the economy first, before you pick a stock...

Now, the sector, if it's in a charmed place like the drug stocks, that's worth up to five points, because half of a stock's performance is predicted from the sector. You can't have a great house (i.e., your stock) in a bad neighborhood (i.e., the sector) and make money. You need the worst house in a great sector, a great neighborhood that makes money.

HD and LOW aren't plain old retailers. They're home improvement stores that are unfortunately very much tied to the strength of the housing industry...

Now you know my stance on housing... we've got 309 days until the industry bottoms... which means that, when it comes to the sector, LOW and HD will be in a better place in the future than they are right now. That's a hindrance to their stocks. Even though both companies just beat earnings, a sign that the Street had gotten too negative on the business, I think that home retailers are not a great business right now. What they are is really a 2, with 1 being the big cyclical stocks, the worst right now... 2, and they're moving to a 3... Remember, that's out of a 5-point per sector.

So let's split the difference...

We think that these guys are getting... should get 2.5 points each... that the sector is in motion, going from a 2 to a 3... and, over time, that number will definitely move higher as we get closer to the housing bottom. As usual, we've got a tie, because the sector is the same, right... This gets 2.5 and this gets 2.5, because they're in the same sector...

Now, for the head-to-head comparisons, where we always start with growth, because that's what money managers care about more than any other factor. Growth, growth, growth...

If you're watching the show, and you care about one thing... Cramer likes to look at growth for good stocks. That's the point.

For retailers, the key metric that measures growth are, as we said, same-store sales. And we also need to look at market share growth... Remember, these guys are going head-to-head, so if this guy's doing well, maybe this guy's doing badly. It's a little zero-sum in this industry...

And saturation... that's another key metric for retailers. How close is the company to filling the country with stores, so that it can't grow anymore?... Remember TGT last week? They're in 47 states, and they're having trouble growing.

Ed. note:
How do LOW and HD stack up using these:

1. Same-store sales growth
2. Market share growth
3. Saturation of stores domestically/globally


Jim:   On same-stores, LOW reported a 5.3% decrease last quarter. It sounds bad, but the Street was expecting an 8% decline... And LOW raised guidance, and told the analysts that they were too negative. That's the first time in a long time. Not to mention they did a 16% earnings beat. It was a good quarter for LOW, given the situation. Some of it was the (federal tax $600) rebate... Don't worry about that. HD got the rebate too...

Alright, HD... Same-store sales shrank by 7.9%. Again, people were looking for 10%, so a little better... but it's worse than the numbers LOW put up...

Remember, we're doing head-to-head... I think we have to give LOW 1 point here. And I'm willing to give a half point to HD, because it did come in better-than-expected and beat the earnings estimates, what the Street had, by 15%.

So now the score is 3.5 (points) for LOW, and 3 for HD.

How about market share?...

This is really important, because these companies are going head-to-head in real life.

LOW is taking share. HD's losing it. LOW took share in 17 of its 20 product categories. Boy, is this recession made for them. They gained 120 basis points, or 1.2% of market share. HD lost share in 8 of 13 categories.

Another point to LOW, okay...

So now you're looking at 4.5 for LOW, 3 for HD. So LOW is widening its lead.

How about room for growth (i.e., saturation)?...

HD has an amazing number of stores. 2,234 stores. I think they actually have too many... mostly in the U.S., but some in Canada, Mexico and China... HD expects to open 55 new stores, but last quarter it opened net zero stores, because it closed 15 underperforming ones. That's actually good, believe it or not.

Now, LOW only has 1,575 stores... some in Canada, the rest in the U.S. LOW expects to open 120 stores, 7-8% growth in square footage... and it opened 23 stores last quarter.

Let's give LOW another point, because it has much more room to grow. It has the upper hand in terms of store growth and, if the (housing) industry is close to a bottom, that's really good news.

So now LOW is now 5.5. Little HD is 3.

HD does have the superior dividend... it yields 3.3% and LOW is only 1.4%... but wait a second... HD is once again the despot in the category, but let's only give it a half a point, and I'll tell you why in a second... We're only going to give this one a half a point, because it's dividend is bigger. Well, the reason why that is, quite frankly, is because the stock fell so much. That's why the yield is so big...

Now, here's the conundrum... Even though LOW is clearly the better company, it's got a price-to-earnings multiple of 15.5%... HD's multiple is slightly lower at 15.3%.

I would not touch HD with a 10-foot pole. LOW, on the other hand, looks pretty attractive... especially on a pullback...

I mean, look at this... 5.5 (points)... to 3.5 (points), but their multiples are roughly similar...

That means you buy LOW.

If I were at my hedge fund, and I never recommend short selling... but I would probably be buying LOW and selling (short) HD...

Here's the bottom line...  

.  .  .  .  .

The Bottom Line!:     If you think the home improvement market is improving, the stock to own is Lowe's (LOW), not Home Depot (HD).

 

   
 

Stock Snapshots - Includes all stocks mentioned above

 

 

Jim
Cramer's
rating on
this stock

STOCK
SYMBOL

Closing
price
that
day

Opening
price
next
day

Full Company Name/Comments
(see comments above for each)


HD

27.02

na

Home Depot (HD)


LOW

24.56

na

Lowe's (LOW)

 

 



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