Lowe's Companies, Inc. (LOW) operates more than 1,974 home improvement and hardware stores and sells its products through its websites and mobile application. The Mooresville, N.C., company offers a wide range of construction, maintenance, repair, remodeling, and decorating products. In comparison, Atlanta, Ga.-based The Home Depot, Inc. (HD) operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, lawn and garden products, and décor products.

The home improvement industry has witnessed solid growth since the onset of the COVID-19 pandemic. People are spending more time at home, upgrading their living spaces, and repurposing existing spaces to make them home offices. And although the economy is reopening at a fast pace, the hybrid working trend is expected to continue for the foreseeable future, buoying the demand for home improvement. This, along with increasing new home purchases, should keep driving the need for home improvement products. Indeed, according to Brandessence Market Research, the home improvement market is expected to grow at a 4.5% CAGR through 2026. So, Both LOW and HD should benefit.

HD’s shares have gained 31.7% in price over the past year, while LOW has returned 31.4%. However, LOW’s 12.1% gains over the past nine months are significantly higher than HD’s 7.4% returns. And LOW is the clear winner with 24.3% gains versus LOW’s 10.8% returns in terms of the past six months’ performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On Feb.3, 2022, LOW's launched its first modern style exclusive brand, Origin21, which delivers an approachable, contemporary design for everyday living across the entire home. Sarah Dodd, LOW's senior vice president, global merchandising, said, "We're excited to bring Origin21 to our customers, which is just part of our larger goal to offer consumers everything they need to finish their home improvement projects, all at an exceptional value."

On Jan. 11, 2022, HD introduced the Pro Xtra Credit Card, a new iteration of its Commercial Revolving Charge, along with updates to its Commercial Account Card, enhancing its commercial credit offerings for Pro Customers and their businesses. These moves aim to help Pros save time and money and thereby increase the company’s sales.

Recent Financial Results

LOW’s net sales increased 2.7% year-over-year to $22.92 billion for its fiscal third quarter, ended Oct. 29, 2021. The company’s operating income grew 28.2% year-over-year to $2.79 billion, while its net earnings came in at $1.90 billion, representing a 174% year-over-year increase. Also, its EPS was $2.73, up 200% year-over-year.

HD’s net sales increased 9.8% year-over-year to $36.82 billion for its fiscal third quarter, ended Oct. 31, 2021. The company’s operating income grew 19.4% year-over-year to $5.80 billion, while its net earnings came in at $4.13 billion, representing a 20.3% year-over-year increase. Also, its EPS was $3.92, up 23.3% year-over-year.

Past and Expected Financial Performance

LOW’s net income and EPS have grown at CAGRs of 30.5% and 36.7%, respectively, over the past three years. Analysts expect WMT’s revenue to increase 6.8% in fiscal 2022 and 1.4% in fiscal 2023. The company’s EPS is expected to grow 34.9% in fiscal 2022 and 8.2% in fiscal 2023. Furthermore, its EPS is expected to grow at a 16.7% rate  per annum over the next five years.

In comparison, HD’s net income and EPS have grown at CAGRs of 14.7% and 17.8%, respectively, over the past three years. The company’s revenue is expected to increase 13.7% in fiscal 2022 and 2.4% in fiscal 2023. Its EPS is expected to grow 29.6% in its fiscal 2022 and 4.7% in fiscal 2023. Also, HD’s EPS is expected to grow at a 14.4% rate per annum over the next five years.

Profitability

HD’s trailing-12-month revenue is 1.55 times LOW’s. HD is also more profitable, with gross profit and net income margins of 33.72% and 10.79%, respectively, compared to LOW’s 33.08% and 8.63%.

Furthermore, HD’s 1,240.31%, 20.45%, and 32.21% respective ROE, ROA, and ROTC are higher than LOW’s 657.83%, 16.22%, and 27.25%.

Valuation

In terms of forward non-GAAP PEG, HD is currently trading at 2.38x, which is 133.3% higher than LOW’s 1.02x. And HD’s 2.76x forward EV/S ratio is 49.2% higher than LOW’s 1.85x.

So, LOW is relatively affordable here.

POWR Ratings

LOW has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, HD has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

LOW has a C grade for Value, which is consistent with its 0.82x forward EV/S , which is 58.4% lower than the 1.98x industry average. However, HD has a D grade for Value, consistent with its 2.93x forward EV/S, which is 104.6% higher than the 1.43x industry average.

Among the 61 stocks in the B-rated Home Improvement & Goods industry, LOW is ranked #12. In comparison, HD is ranked #25.

Beyond what I have stated above, we have also rated the stocks for Sentiment, Stability, Quality, Growth, and Momentum. Click here to view all the LOW ratings. Also, get all the HD ratings here.

The Winner

The home improvement industry is expected to grow significantly with solid demand for remodeling. While LOW and HD are expected to benefit, we think it is better to bet on LOW now because of its lower valuation.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Home Improvement & Goods industry here.

HD shares were trading at $356.55 per share on Thursday afternoon, down $7.82 (-2.15%). Year-to-date, HD has declined -14.09%, versus a -5.11% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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