With the stock market seemingly hitting new all-time highs on a regular basis, you might think there aren’t any bargain stocks out there today. But the company I’m going to discuss below has flourished during the pandemic and is benefiting from a robust housing market in the U.S. And it’s poised for solid growth in the years ahead. Best of all, investors can get all of this for an extremely attractive valuation.
Which stock am I talking about? Read on to find out.
Challenging the leader in the industry
The second biggest home improvement retailer by sales, Lowe’s (NYSE:LOW), is a value stock that should be on your radar right now. Its current forward price-to-earnings (P/E) ratio of 18 is below the S&P 500‘s multiple of 22. However, Lowe’s is a better-than-average business that deserves at least the same multiple as the broad market.
Both Lowe’s and its larger rival, Home Depot (NYSE:HD), saw their sales soar during the pandemic. In the year ended April 30, 2021, comparable sales increased at least 24% each quarter. Although this metric declined 1.6% in the fiscal 2021 second quarter, the company faced a difficult comparison to the summer of last year. The latest quarter’s operating margin of 15.3% was the highest it has been in at least five years. And digital sales were up 151% over the same period in 2019.
Home Depot definitely possesses some superior attributes to Lowe’s, particularly when it comes to return on invested capital and sales per square foot. However, Lowe’s is making strides with its focus on gaining professional customers. Compared to do-it-yourself (DIY) customers, pros spend more and visit stores more frequently.
Professionals now account for roughly 25% of Lowe’s overall sales, and management is keen on closing the gap with Home Depot (where pros account for about 45% of the business) in this area. That alone makes it an attractive stock, not only from a value perspective but from a quality perspective as well. During the fiscal second quarter, comparable sales for professional customers grew 21% year over year and 49% on a two-year basis. Furthermore, the company is improving its ability to cater to the demanding needs of these customers by creating better store layouts, bolstering the digital shopping experience, and strengthening the loyalty program.
“Every day, we are striving to demonstrate that Lowe’s is the new home for pros,” Executive Vice President of Stores, Joe McFarland, mentioned on the recent earnings call. Lowe’s momentum is strong, and as it continues gaining market share, expect the stock price to move higher.
Robust housing market
Supporting Lowe’s investment case is the backdrop of a booming housing market. Historically low interest rates and a short housing supply have pushed up home prices. CEO Marvin Ellison’s comments on the earnings call should give investors plenty of confidence in owning the stock: “Our research shows that it will take years for the supply of homes to meet the projected demand. This remains a very positive indicator for home improvement.”
Lowe’s is not only making big strides in growing its professional business to better compete with Home Depot, but the company is also riding a positive macroeconomic environment for its industry. Wall Street analysts are optimistic as they expect earnings to jump 28% this fiscal year.
Don’t let this potentially lucrative opportunity pass you by — Lowe’s is a value stock you want in your portfolio.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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