Stock In The Spotlight: Lowe's Companies

It is time for our weekly Stock in the Spotlight series. This week, fresh off reporting Q2 earnings, we will cover the likes of Lowe’s Companies (LOW).

Lowe’s is the second largest home improvement retailer on the market today, in what has been a duopoly for a number of years. Though the home improvement space is a two horse race, it is clear who the leader is in the sector, The Home Depot (HD). Lowe’s has lived in the shadow of HD for a number of years.

Part of the reason is due to the fact HD has been the gold standard for efficiency. HD has outperformed Lowe’s on many major metrics year in and year out. Let me put this out there right now, Lowe’s is closing the gap.

Lowe’s CEO Marvin Ellison took the reigns as CEO of the company in mid-July 2018. Mr. Ellison was formerly the CEO of JC-Penny, but prior to that he was an executive at Home Depot. He is a veteran of the industry and understands how to create efficiencies coming from HD.

Since joining Lowe’s, Mr. Ellison has hit the ground running by:

• Closing all Orchard Supply Hardware Stores

• Announcing closing of 50+ under-performing Lowe’s store locations

• Reducing under performing SKUs

• Enhancing Supply Chains

• Rearranging store looks

These have been some major changes, especially the supply chain changes, but you can begin seeing his fingerprints on the company now and enhancements starting to shine through the financials.

Let’s take a look at the company’s Q2 Earnings

Lowe’s Reports A Blowout Quarter

As you can see, the company CRUSHED it. The pandemic has contributed to a lot of this growth, but I believe some credit needs to given to the job Marvin Ellison has done in steering this ship in the right direction.

However, the pandemic has been the perfect storm for the company in a way. Many US consumers are stuck at home causing them to rethink many of the home improvement projects they have been putting off.

This has led to a BOOM for the industry. Same-store sales, a common metric tracked within the industry, increased 34.2% during the quarter, including 35.1% in the US. These are INSANE numbers considering just a year ago the company reported same-store sales growth of 2.3%.

Will this type of growth continue? In the short term, yes! In the long term, these are going to be extremely hard comps to beat in 2021.

When Mr. Ellison took over in 2018, the company had gross margins and operating margins of 32% and 7%, respectively. Today, the company has reported gross margins and operating margins of 34% and 14.5%, respectively. These are great improvements for the company.

Lowe’s Moving Forward

There is a lot to like about Lowe’s moving forward. You could make the case that shareholders of LOW are more confident than those of HD. That would be a big claim given how consistent a performer HD has been over the years.

Let me explain. HD has been the clear front runner for a number of years. Lowe’s has been led by questionable leadership who made questionable acquisitions, which were later reversed when Mr. Ellison took over. The reason to be excited as a shareholder of Lowe’s is due to the fact the company has a lot more room for improvement. We know what HD is capable of, so we know how much better Lowe’s can get.

In terms of valuation, shares of Lowe’s currently trade for $158.58 with a P/E multiple of 20.2x. With earnings being SO high, this actually keeps them in-line with their 5-year average of 21.2x, but we know this type of growth is not expected.

On a P/S metric, the company currently trades at 2.1x compared to their 5-year average of 1.5x.

In regards to the dividend yield, the company current yields a dividend of 1.39%, which is above their 5-year average yield of 1.71%, indicating the stock could be overvalued.

Let’s look at the charts.

You can see the stock is hovering right around all time highs. The RSI is currently trading at a value of 75.4 indicating the stock is overbought, while the MACD is relatively flat.

From a fundamental standpoint, the stock does not look extremely overvalued, but that is if you consider these past few quarters normal, which I do not. The chart is telling me the stock is overvalued and being that they have had this strong of a run with no real breather since March, I am going to have to pass at the moment and wait and see if I can pick up shares at a cheaper price, preferably below $150.

Please comment below or shoot me an email on your thoughts. Also, if you have not yet checked out my YouTube channel, have a look at click the subscribe button.

I just launched that this week and will be looking to add new content on a weekly basis.

As always, have a great weekend!

Mark