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Tickers in this Article: LOW, HD, KBH, DHI, LEN, PHM
With sales of $43.2 billion in 2005, Mooresville, NC-based Lowe's (LOW) is the second-largest homebuilding supplies retailer in the world. Big brother Home Depot (HD) is number one with retail sales of $81.5 billion last year.

Negative news about the U.S. housing market has pushed these big box hardware supply companies and homebuilders stock prices down to attractive investment levels. Housing stocks such as KB Homes (KBH), D.R. Horton (DHI), Lennar (LEN) and Pulte (PHM) have risen on average 30% from summer time lows experienced between July and August this year.

During the same time period, stock prices for Lowe's and Home Depot have increased 17%. While the "housing bubble" debate may continue, home building investors seem to have made up their own mind.

Despite news headlines of a nationwide slow down in housing starts and existing home sales, Lowe's reported a 10.8% increase in net earnings over last year for its 3rd quarter ending November 3, 2006.

In select states, this holiday season Lowe's has been full of customers looking for everything from lumber to build wheelchair accessible ramps to flooring and drywall for rehabs and new construction.

What new construction, right? Several markets including sunny Alaska, North Carolina, Arkansas and Texas, where job growth is on the rise, are continuing to build and sell homes for their new arrivals.

In comparing valuations, Lowe's price to earnings growth (PEG) ratio of 0.97 is slightly better than Home Depot's 1.05. Home Depot does score a lower price to earning (PE) ratio of 13.25 versus Lowe's PE of 15.19. Lowe's lower PEG ratio suggests a trailing twelve month growth rate of 16% versus 12% for Home Depot. Lowe's higher PE ratio suggests that analysts have higher earnings expectations for Lowe's, as new store opening costs are absorbed prior to cash flows from the new stores.

The downturn in the market forecast for building supplies did nothing to stop Lowe's 155 new store expansion plans for 2006. Lowe's is targeting 49 store openings during the 4th quarter. Lowe's will also be opening up 10 stores in Ontario, Canada in the beginning of 2007. The move across the U.S. border is Lowe's first international step, while Home Depot has been operating more than 100 stores in Canada for years.

Expansion during the current housing slow down makes sense for Lowe's, who has an eye on the future. Lowe's executives point to 5 year lows in unemployment, low interest rates and moderate gas prices as economic pillars that will continue to support the U.S. economy and the hardware supply industry. Lowe's currently operates more than 1,300 stores in 49 states.

Lowe's same stores sales dropped 4% for the 3rd quarter versus a 6.2% increase in the same period a year ago. Same store sales for the first nine months edged up 1.7%. One cause for the drop-off is related to the deflation of lumber prices in the commodities market. Wholesale price of structural lumber dropped more than 20% over last year and more the 15% below historical averages. Volumes of lumber sales were also pressured by slow home building in most states.

According to the Fine Living Network, Americans are spending upwards of $168 billion a year on home improvement. Needless to say there is sufficient room for these two home improvement retail giants with the prospects of further expansion into international markets and the future recovery of the U.S. housing market.

Lowe's closed on December 13th at $30.63, just above its July 3rd, 2 for 1 split-adjusted stock price. It's also worth noting that Lowe's initiated a $1.7 billion share buyback program during the first nine months of the year with approval for the repurchase of an additional $1.5 billion through 2007.

Lowe's 4th quarter fiscal year ends February 7, 2007. Due to 2006 being one week shorter than 2005, Lowe's is expecting full year earnings comparisons to be lower, which could depress the stock price and give investors another opportunity to pick up shares of the big blue home building supply store.

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