In this article, I have evaluated prominent home improvement stocks, Lowe's Companies, Inc. (LOW) and The Home Depot, Inc. (HD), to determine which is the better buy. After thoroughly evaluating these stocks, I think while LOW could be a solid buy, waiting for a better entry point for HD could be ideal for the reasons discussed in this article.
The global home improvement services market is expected to grow at a CAGR of 4.6% until 2028. The increasing need for remodeling homes, the rising adoption of smart homes, and the growing requirement for energy-efficient living spaces represent some of the key factors driving the home improvement market.
Furthermore, the rising popularity of DIY products among consumers and the significant increase in the adoption of innovative technologies are expected to drive the growth of the do-it-yourself (DIY) home improvement market. The DIY home improvement market is expected to grow at a CAGR of 3.4% until 2029.
While LOW has gained 7.9% over the past month as compared to HD’s 5.9% gain, LOW also gained 11.9% over the past nine months compared to HD’s 26% gain.
Here are the reasons why I think LOW might perform better in the near term:
Recent Developments
On February 21, 2024, LOW announced a new partnership with Sunrun (RUN) to provide households with solar and storage services inside of hundreds of Lowe’s stores across the country.
Conversely, on January 30, 2024, HD partnered with Tunnel to Towers to present Maggie and her wife with a mortgage-free smart home that is specially adapted to her accessibility needs. The house is outfitted with automatic doors, oversized doorways and wider hallways. Every feature of the home can be controlled through a tablet or a smart device.
Recent Financial Results
In the fourth quarter ended February 2, 2024, LOW generated net sales of $18.60 billion. The company’s net earnings amounted to $1.02 billion, up 6.6% year-over-year. Also, its EPS increased 12% from the prior-year quarter to $3.06.
On the contrary, for the fourth quarter that ended January 28, 2024, HD’s net sales came in at $34.79 billion. The company’s gross profit came in at $11.51 billion. Its net earnings came in at $2.80 billion and EPS stood at $2.83.
Past And Expected Financial Performance
LOW’s revenue has increased at a CAGR of 1.9% over the past three years. Its revenue is expected to be $18.47 billion in the fourth quarter ended January 2024 and $21.64 billion in the first quarter ending April 2024. Its EPS is expected to be $1.68 in the fourth quarter ended January 2024 and $3.44 in the first quarter ending April 2024.
Conversely, HD’s revenue has increased at a CAGR of 4.9% over the past three years. Its revenue is expected to increase 3.8% in the year ending January 2025 but decline 1.6% in the first quarter ending April 2024. Its EPS is expected to gain 4.4% in the year ending January 2025 but decline 1.8% in the first quarter ending April 2024.
Valuation
LOW’s forward EV/EBITDA multiple of 13 is lower than HD’s 16.43. LOW’s forward EV/Sales multiple of 2x is lower than HD’s 2.64x.
Thus, HD is more affordable.
Profitability
LOW's trailing-12-month gross profit margin of 33.33% is lower than HD’s 33.38%. In addition, LOW’s trailing-12-month EBIT margin of 12.79% is lower than HD’s 14.21%.
POWR Ratings
LOW has an overall rating of B, translating to a Buy, in our proprietary POWR Ratings system. Conversely, HD has an overall rating of C, which equates to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. LOW has a C in Value. Its forward EV/EBIT of 15.04x is 8.8% higher than the industry average of 13.82x. Its forward EV/EBITDA multiple of 13 is 30.5% higher than the industry average of 9.96.
In contrast, HD has a D grade for Value. HD’s forward EV/EBIT of 18.89x is 36.7% higher than the industry average of 13.82x. Its forward EV/EBITDA multiple of 16.43 is 65% higher than the industry average of 9.96.
Among the 56 stocks in the B-rated Home Improvement & Goods industry, LOW is ranked #11, while HD is ranked #31.
Beyond what we’ve stated above, we have also rated both stocks for Stability, Sentiment Momentum, and Quality. Get all LOW ratings here. Click here to view LOW ratings.
The Winner
Rapid urbanization, inflating income levels, and changing living standards are strengthening the home improvement market. Industry players such as LOW and HD are well-positioned to benefit from these industry tailwinds.
However, HD's elevated valuation and mixed growth prospects makes its competitor LOW, the better buy.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Home Improvement & Goods industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
LOW shares were trading at $235.32 per share on Tuesday afternoon, up $4.00 (+1.73%). Year-to-date, LOW has gained 6.27%, versus a 6.31% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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