Financial Pros Pick Lowes Over Home Depot

For as long as we can remember, our Trackstar data showed Home Depot (HD) as the top home improvement stock search by financial pros.

So, it was a BIG DEAL when we saw Lowe’s (LOW) move into the top spot.

Despite tepid growth prospects, LOW trades at just 10.1x forward operating cash flow and 16.6x forward earnings, which is historically cheap.

But there may be another reason that could give the entire home improvement sector a boost…

Lowe’s Business

Step into any one of Lowe’s more than 2,200 stores across the U.S. and Canada, and you’re walking into a homeowner’s paradise. 

Lowe’s has etched its unique value in the home improvement game, competing with Home Depot with top-notch products and stellar service without breaking the bank.

Get this, the company serves over 20 million customers per week including DIY weekend warriors and professionals.

In fact, it’s the latter segment that’s been a key focus as they tend to have higher margins and larger ticket purchases.

Source: Lowe’s 2022 Annual Presentation

The key to Lowe’s success over the next several years lies in the housing shortages in the U.S.

After the pandemic, demand for homes soared while supply stagnated. That’s left an imbalance that still exists.

While new homes are being constructed, many are turning to remodels as a way to increase inventory, directly benefiting Lowe’s. 

Plus, the work-from-home trend has been a boon.

Financials

Source: Stock Analysis

Lowe’s revenue growth has been positive for the last decade, albeit choppy.

The latest forecasts put the retailer’s sales down 2.4% YoY. This comes as comparable store sales dropped 1.6% in the last quarter, although Pro and online sales rose.

Management expects the short-term pain of a possible recession and inflation is holding back consumer spending after a post-pandemic splurge.

There’s also a concern with the debt load, which exploded from $26.4 billion in 2021 to $40.5 billion, increasing interest expenses from $872 million to $1.3 billion.

The money was largely used to repurchase shares, which could be a good investment if the interest rate on the debt issued is low enough.

Valuation

Source: Stock Analysis

As we mentioned earlier, LOW is trading at a historically cheap valuation.

Compared to HD, it’s forward P/E ratio is about 25% lower, as is the forward price-to-cash flow ratios.

Companies like Floor & Decor (FND) trade at higher multiples but have a bit more growth.

Growth

Source: Seeking Alpha

Across the board, revenue growth looks bleak, whether at a home improvement retailer or a flooring company like Mohawk (MHK).

This implies a negative outlook on the U.S. housing market, which we don’t share.

We are more in line with the average growth from the last few years which has landed between 5%-10%.

Profitability

Source: Seeking Alpha

While LOW may be cheaper, it’s also struggled to match HD margins over the years, always coming up just short.

Management hopes its focus on continual supply chain improvement and digital channels will bridge the gap.

Our Opinion 7/10

Lowe’s is a great company that, although exposed to recessions more than a grocer, is still somewhat insulated.

At just 10x forward operating cash, we think it’s ripe for the picking.

Our ideal entry is somewhere around $200. However, we can’t argue with starting to build a position here.