Should I Buy Lowe’s? 3 Pros, 3 Cons

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The past year has been pretty good for Lowe’s (NYSE:LOW) shareholders, who have watched their investment appreciated 27% in the past year, an 17% annually since 2010.

However, when compared to rival Home Depot (NYSE:LOW), the performance seems a bit lackluster — HD posted an impressive 45% return in 2012, averaging 31% annually the past three years.

So, is Lowe’s a bargain waiting to be discovered, or is there good reason for LOW being held back in comparison to its home-improvement nemesis? To see, let’s take a look at the pros and cons:

Pros

Scale and Growth: As the No. 2 home improvement operator, Lowe’s has tremendous power with its distribution and infrastructure; for instance, it has a network of 14 state-of-the-art distribution centers that are crucial in providing lower costs on merchandise. While the U.S. real estate market has been improving and driving Lowe’s of late, future growth is likely to come from foreign markets, such as Canada, Mexico and even Australia (via a joint venture with Woolworths). These countries still have low penetration rates for big-box locations.

E-commerce: While the company did not break out the amount, revenues from this segment climbed 50% last year. At the core of the online strategy is the MyLowe’s system, which allows users to track everything about a project. Lowe’s also has moved toward integration with mobile platforms like Apple’s (NASDAQ:AAPL) iOS. A big current initiative is improving the search features of the website — the simple logic is that by making it easier for customers to find relevant products, the company should see higher sales rates. Lowe’s also recently launched an e-commerce site in Canada, which should further prop sales.

Financials: Healthy. Last year, LOW’s cash flows came to $3.8 billion, and the company reinvested $1.2 billion back into the business. Lowe’s also has been aggressive with share buybacks — the company’s 2012 repurchases totaled $4.35 billion, and the company also announced a $5 billion buyback program for the next two to three years.

Cons

U.S. Economy: Even as the real estate market continues to rebound, Lowe’s still might feel pressure from a sluggish overall economy, causing reluctance in some customers to make larger purchases. According to Lowe’s own surveys, the expectation is that spending will remain the same or decline compared to 2012 levels. The two main reasons: weak income growth and continued difficulty of acquiring financing. As a result, much of the growth for Lowe’s will likely be for tickets less than $500.

Merchandising: Lowe’s has been weak in this category compared to Home Depot. The company is flat-footed when it comes to stocking key items, managing local needs or getting premium products. Lowe’s is taking steps to rectify this shortcoming, but this isn’t a problem that’ll go away — or show up on the balance sheet — overnight.

Vendor Relations: These have been rocky for the most part. The main issue: Lowe’s has been tough on vendors to exact better terms, but it’s a risky approach — especially when it comes to vendors that provide premium products. You lose these guys, and you risk an adverse effect on revenues.

Verdict

Until the implosion of the real estate market in 2006, Lowe’s was a standout growth company. But it got too complacent and failed to keep up new innovations and improve merchandising. For years, Lowe’s has been taking hard but necessary steps to get back on track.

The good news: While Lowe’s still has lagged Home Depot, its moves have been for the best, and investors should expect continued improvement in growth — especially from e-commerce and investments in foreign markets. And naturally, the rebound in the U.S. real estate market should also be a powerful driver.

So should you buy Lowe’s? Yes — the pros outweigh the cons on the stock for now.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities, and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2013/04/should-i-buy-lowes-3-pros-3-cons/.

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