Lowe’s Stock Undervalued Compared To Home Depot?

Lowe’s Stock Undervalued Compared To Home Depot?

Both home improvement retailers in the U.S, Lowe’s (NYSE: LOW) and Home Depot (NYSE: HD), are riding high on the Covid-19 wave as customers spent more of their disposable cash on home improvement projects rather than on vacations or dining out. But is Lowe’s stock appropriately priced compared to Home Depot stock? We believe that Lowe’s stock is very undervalued compared to HD stock, due to the notable mismatch in their current P/S multiples when compared with revenue growth and operating margins for the two companies over recent years. Lowe’s P/S multiple of 1.5x is substantially lower than the figure of 2.3x for Home Depot.

Lowe’s revenue growth over the last twelve months changed by 18.9{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb}, which was higher than the figure of 13.2{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} for Home Depot. During the same period, the operating margin for Lowe’s changed by 2.7 percentage points, again better than the change of -0.3 percentage points for Home Depot. Our dashboard Lowe’s vs. Home Depot: LOW stock looks very undervalued compared to HD stock details the full picture based on revenue growth and operating margin – parts of which are summarized below.

1. Revenue Growth

While Home Depot still generates 1.5x more revenues than Lowe’s, the latter’s revenue growth was higher over the last 12 months in 2020 (19{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} vs 13{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} for HD).

  • Of course, the odds of either retailer sustaining their recent levels of growth post-Covid are slim. But Lowe’s still has plenty of room to grow, given its recent e-commerce improvements. Lowe’s Total Home strategy is an encouraging development that sets the stage for this possibility. The initiative aims to enhance customer engagement and grow market share.
  • Going forward, Lowe’s greater focus on its professional contractor consumers is providing a boost that could outlast the current homeowner demand.

2. Operating Income

Coming to operating income, Lowe’s had a clear edge over Home Depot in the last one year.

  • Lowe’s operating margin was 8.4{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} for the most recent twelve-month period, which is lower than Home Depot’s operating margin of 14.1{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb}
  • Over the last twelve months, the operating margin for Lowe’s changed by 2.7 pp (percentage points) – better than the change of -0.3 pp for Home Depot
  • In the nine months of fiscal 2020 so far, Lowe’s same-store sales growth of 26{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} in the U.S. prompted a 52{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} year-over-year improvement in operating income. Home Depot’s same-store sales were only up 18{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} for the same period, prompting a more modest 14{911ea05452e114f1778c76ca86733b6032c246f8f651bb1f01d12abf04b54efb} increase in operating profits.

The net of it all

In summary, the net advantage moves back to Lowe’s based on its higher revenue growth and better operating income growth in the current scenario as compared to Home Depot. While Home Depot is still more profitable, Lowe’s stock has performed better in 2020. Lowe’s and Home Depot trade at an almost similar 2x projected 2021 Revenue. In addition, Lowe’s shares are trading at 17 times estimated FY 2021 earnings, and Home Depot trades at 22 times the same estimates relative to projected earnings.

While Lowe’s stock is worth considering, 2020 has created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Amazon vs Etsy.

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