Lowe’s Companies, Inc. (NYSE:LOW) soared after earnings on Mar 1. It beat analyst estimates with earnings of 86 cents per share, against 79 cents. LOW stock beat analyst estimates on revenue at $15.78 billion instead of $15.39 billion. It beat last year’s 1 cent of earnings and revenue of $13.24 by a country mile.
Our Tom Taulli expects the stock’s rally to continue. He likes the company’s ability to sell online as well as in stores, he likes the environment for home improvement, and he loves the $3.5 billion in share repurchases the company plans.
It’s true. Over the last year, the share count has dropped from 911 million to 866 million. Oh, the dividend was also raised to 35 cents per share from 28 cents last year.
But is Lowe’s really worth a premium price over stock in its arch-rival, Home Depot Inc (NYSE:HD)? Why are you paying 25% more for the same hamburger?
Growth vs. Size in LOW Stock
The rally in LOW stock has pushed the price-to-earnings ratio to 29.9. Home Depot is at 22.8. It’s not that you’re getting a fatter yield, either. Lowe’s shareholders are earnings 1.7% of the stock price on their dividends each year, against 2.4% for Home Depot.
Much of that premium is tied to growth rates. Home Depot sales are growing at about 5% per year. The great quarter gave Lowe’s a year-over-year growth rate of 19%.
The question is whether that is sustainable.
Lowe’s is reducing head count at its main offices. A new store staffing model should mean 2,400 fewer jobs overall. Lowe’s has 1,840 stores with plans to open 15-20 more each year, a growth rate of less than 2%.
As a regular user of both Home Depot and Lowe’s, I have a theory as to why LOW stock had a better Christmas quarter than Home Depot. It has to do with the merchandise mix. Lowe’s sells a lot of appliances. It sells a lot to consumers, while Home Depot sells more to contractors. And consumers are buying more at Christmas than contractors.
I suspect investors today are paying a premium price for performance that won’t be easy to replicate. That investment strategy often ends in tears.
The Case for Lowe’s
Of the 31 analysts now following Lowe’s, 18 have it rated as a buy and 12 as a hold. They are expecting $1.05 per share of earnings for the current quarter, and $1.62 per share for the big spring quarter. If the company can meet their estimates of $4.63 per share in earnings for the coming year, you’re looking at a forward P/E of just 17.6, which is below the market.
Lowe’s is trying some flashy things to attract consumers to make bigger purchases. It has a virtual reality room in one store so people can check out bathroom remodeling techniques. It’s the product of an Innovation Lab that has it appearing around many tech trade shows.
Flash merchandising is good. It shows you’re trying. But we’re talking about lumber and toilets.
The Bottom Line for Lowe’s
Lowe’s is a nice company, and its small size relative to Home Depot gives it some key advantages.
It’s easier to get a big percentage bump in sales when your sales are lower. LOW stock has a market cap of $71 billion, which pales in comparison to Home Depot’s $180 billion. As I noted yesterday, Home Depot has made a turn toward yield that Lowe’s has not yet executed.
But right now, Home Depot is much the better buy. Lowe’s had a great quarter but Home Depot has had stellar decades. My guess is that when valuations return to “normal,” Home Depot will be rising, and Lowe’s will be adjusting downward.
The lesson is the same one you learn as a shopper. Don’t rush into a store after everyone else has rushed in. You’re not going to find bargains that way.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud , available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.