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Why Lowe’s Is Stuck In Home Depot’s Shadow

LOW earnings show improvement, but the company still lags HD


Lowe’s  (LOW) is the Jan Brady of home improvement chains: the plain Jane middle child on the classic 70’s sitcom The Brady Bunch, forced to bask in the shadow of her pretty, glamorous older sister Marsha, better known to investors as Home Depot (HD).

Like the hapless Jan, the North Carolina-based chain can’t catch a break, even though shares of LOW have jumped more than 35% this year, outperforming Home Depot, which gained about 30%.

Wall Street, though, has a very short-term memory. And by that standard, Lowe’s, which reported a disappointing quarter a day after Home Depot blowout, pales in comparison to its big sister. However, results from the No. 2 chain showed that  CEO Robert Niblock’s turnaround continues to show results.

Slow But Steady

In the most recent quarter, net income surged 26% to $499 million, or 47 cents per share. That’s a significant improvement over the $396 million, or 35 cents, a year earlier, and just a penny shy of Wall Street’s forecasts.

Sales increased 7.3% to $13 billion, buoyed by the strength of the housing market, and better than the $12.72 billion analysts had expected. Same store sales, a key metric measuring activity at stores opened at least a year,  jumped 6.2%, but failed to match the the 7.4% gain Home Depot reported.

Though Lowe’s raised its earnings guidance for the fiscal year $2.15 per share from $2.10, the company failed to wow Wall Street, which was expecting $2.19. Lowe’s shares got pounded as a result, tumbling $2.39, or nearly 5%.

Home Depot has the advantage of close ties with contractors, many of whom have gotten busier as the housing market continues to rebound. Contractors make good customers for the chains since they spend big bucks: According to Reuters, these businesses account for 35% of Home Depot sales compared to only 25% for Lowe’s.

“Some analysts say it is hard to close that gap quickly because Home Depot has more stores than Lowe’s in major metropolitan areas, where many of the professional contractors are based,” according to the news service.

Though its unlikely that Lowe’s will capture market share from Home Depot, the company should continue to do fine as long as the macroeconomic trends hold up. Many consumers, including this one, have put off or delayed making improvements to their homes during the recent economic slowdown. People are also upgrading their appliances — another key business for the chains, as evidenced by Whirlpool’s recent better-than-expected earnings report.

Lowe’s currently trades about 7% under its average 52-week price target of $51.09. Its price-to-earnings multiple is about 21, in line with Home Depot’s. The larger chain also is trading ahead of its average target of $85.77, though Telsey Group recently raised its price target on the stock to $92.

In the company’s earnings release, Niblock noted that “the home improvement industry is poised for persisting growth in the fourth quarter and further acceleration in 2014.” Not surprisingly, his counterpart at Home Depot, Frank Blake, also struck an optimistic tone, noting on the company’s earnings conference call that the quarter was so good that all the company’s stores qualified for its profit-sharing program.

The optimism of Niblock and Blake is backed up by a recent forecast from the National Association of Realtors which shows that while existing home sales will remain flat in 2014, prices will increase by 6% even as interest rates rise. Even more telling, though, is NAR’s expectations that sales of new homes will increase by 18.5% to 510,000, which will means more contractor trips to Lowe’s and Home Depot.

Bottom Line

Though I like rooting for the underdog and had a crush on Jan Brady when I was younger, I think investors should take a pass on Lowe’s — the stock seems like its fully valued at current prices. I am not enthused about Home Depot for the same reasons, though if I had to make a choice between the two chains, HD is the clear winner. Home Depot shows no signs of losing its competitive edge and Lowe’s doesn’t seem like it’s going to get one anytime soon.

Investors, though, should wait for a pull back before buying shares of either.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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