For too many years, home improvement retailer Lowe’s Companies, Inc. (NYSE:LOW) struggled to keep up with bigger rival Home Depot Inc (NYSE:HD) in almost every possible metric. Many investors had given up hope that LOW stock would ever be the investment opportunity a stake in HD was.
As the old saying goes though, it’s always darkest before dawn.
Might 2017 be the year investors should start to give Lowe’s stock a closer look, opting for it rather than Home Depot? Several signs say yes, not the least of which is a newfound bullishness from analysts on LOW stock. The corporate numbers are looking surprisingly better to boot.
Meet the New Lowe’s Stock
It has been a long time in the making, but as of last quarter, it appears to have arrived.
That’s an appreciable margin improvement, by the way. For its Q4, the retailer earned 86 cents per share on revenue of $15.78 billion. Analysts were only looking sales of $15.39 billion, and profits of 79 cents per share of LOW stock. That wasn’t the most impressive part of the quarter, however. Even more impressive is that same-store sales grew 5.1%, yet the company didn’t have to sacrifice margins to drive those sales. EBITDA and net profit margins were both up a bit on a year-over-year basis.
Lowe’s seems to have finally found a winning formula. The home-improvement name also expects last quarter’s growth pace to last through the rest of the current year.
It’s an optimism most owners of LOW stock aren’t used to hearing, nor is it a concern most owners of HD have been forced to digest.
Home Depot Still a Powerhouse
To be clear, Home Depot is still the name to beat in the home improvement category. In a recent survey performed by NPD Group of consumer spending habits, Home Depot edged out Lowe’s in terms of mindshare. That is to say, shoppers believed other buyers more likely spent money at Home Depot than they did at Lowe’s.
Perception isn’t necessarily reality, however, and Home Depot can’t rely on its sheer size to keep its smaller rival pinned down in perpetuity. Indeed, Lowe’s appears to be awakening now in an area where size doesn’t matter. That is, one of the core reasons owners of LOW stock were treated to a healthy earnings beat was the company’s progress on the e-commerce front.
Even so, Lowe’s will need to remain diligent and thoughtful in terms of e-commerce. Last quarter, 45% of Home Depot’s online orders were picked up in a store, giving the company another chance to make a sale. Home Depot has also put in place a program that fulfills online orders using merchandise at a store near that customer, allowing for one-day shipping in most cases.
The biggest reason for Q4’s success, though, wasn’t in Lowe’s hands at all. The housing market remains robust, encouraging new construction as well as remodels and redecorating. Permits issued for new home construction reached a one-year high in January, and while homebuilder sentiment has fallen in each of the last two months, it’s still broadly trending higher.
Bottom Line for LOW Stock
Whatever the case, Lowe’s has earned some much-needed respect among investors, analysts and observers by proving it can win its fair share of the home improvement market’s growth. Lowe’s plans on opening 35 stores this year, versus only six new Home Depot locations.
LOW stock won’t come cheap for any newcomers, however. As Dana Blankenhorn voiced the matter last week, “My guess is that when valuations return to “normal,” Home Depot will be rising, and Lowe’s will be adjusting downward.”
GuruFocus’s Sangara Narayanan, however, thinks last quarter’s results could be the new normal for the company, explaining:
“Though it is still way too early to say that Lowe’s has attained parity with Home Depot, there is clear momentum behind Lowe’s …
Lowe’s needs to counter the size and location advantage that Home Depot enjoys in the U.S., and it’s good to see that the company is taking steps in that direction. As with any retailer of scale, the more you sell the better your margins will become. Lowe’s margins have always lagged behind Home Depot’s, and scale is the only way it will be able to close that gap.”
In other words, things change. Sometimes they change for the better.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.