Before becoming CEO of Charlotte-based Lowe’s (NASDAQ:LOW) in July 2018, Marvin Ellison failed to get JC Penney out of its bankruptcy spiral. Still, there was hope he could do for LOW stock what he couldn’t do for the troubled retail giant.
Before that, Ellison was a former Home Depot (NYSE:HD) executive, and since returning to his natural habitat he has created a shining success. The stock is up 83% on his watch, against a 46% rise for its Atlanta-based rival.
The pandemic has helped. Lowe’s sales set a record during the July quarter, during the worst of the lockdowns. The momentum has continued.
Lowe’s stock is still cheaper than Home Depot.
The South Is Key for LOW Stock
Key to Lowe’s rise is the deep south, according to a recent white paper from Placer.AI.
Foot traffic is up nearly 20% in Louisiana, Mississippi, Alabama, and Arkansas, where Lowe’s is stronger. Its market share in Mississippi is nearly twice that of Home Depot.
Lowe’s has also learned how to cater to its best customers with a loyalty program called Lowe’s for Pros, launched in July. About 63% of its store visits are now from regulars, a figure matched only by Home Depot and Menards, a privately-owned chain in the Upper Midwest.
Lowe’s foot traffic has been consistently higher than Home Depot’s since June, although the gap has narrowed in the most recent quarter.
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Lowe’s Isn’t Really Overvalued
Lowe’s is richly valued when compared with the market but still undervalued compared with Home Depot, according to Trefis.
Entering trade on today, Lowe’s was selling around $174/share. That’s a market cap of more than $127.5 billion on estimated fiscal 2021 sales of $72 billion. The company reports the Christmas quarter on Feb. 17, with analysts expecting a profit of $1.19/share on revenue of $19.15 billion.
For a retailer, this is a rich valuation. It’s 1.76 times revenue, and 24 times sales. But Home Depot sells for nearly 2.5 times its sales, and about the same price to earnings. Lowe’s bigger gains mean its dividend of 60 cents yields just 1.4%, while Home Depot’s $1.50 payout yields 2.1%.
Morgan Stanley (NYSE:MS) analyst Simeon Gutman said in December that Lowe’s stock could rise another 40%. Since he made that call, LOW stock is up 16%, while Home Depot is up 7.6%.
Market Share and Lowe’s Stock
Lowe’s is continuing to gain market share. In its most recent quarterly report, covering the period through October, the company more than doubled its online sales. It also improved 15% in merchandising departments, 20% across geographic regions. The company has managed to improve margins even while raising salaries.
The stock’s outperformance has continued into 2021, according to Zack’s. Lowe’s stock is so hot it has doubled the performance of Amazon.com (NASDAQ:AMZN) over the last six months.
Yet Lowe’s bulls continue to pound the table for the stock. One, who bought into the stock last March, says its installation services will continue to drive results, and that it could easily afford a dividend increase. He’s hanging on despite his huge paper gains.
The Bottom Line
I have both a Lowe’s and a Home Depot near me and usually go to Lowe’s first. I’ve used their delivery and installation services and, the first time I ordered a sink online from Home Depot, it broke. (They replaced it, and I took delivery of the new one at the store.)
Both these companies are richly valued right now. Some of the gains from the pandemic are almost certain to be temporary. I think Home Depot still has an edge among professional contractors.
Ellison has done a superb job of improving Lowe’s merchandising, especially online, bringing the chain neck-and-neck with its larger rival. A conservative investor can buy either stock with confidence.
At the time of publication, Dana Blankenhorn owned shares in AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at email@example.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.