Is Lowes Underperforming?
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Housing is back.
Housing starts are up 23 percent over last year, according to the U.S. Census Bureau. New-construction permits are up 19 percent over last year.
Builders are reporting positive news all around: higher sales volume, higher closing prices, fewer concessions, more bidding wars among buyers. The stock prices for all the major homebuilders, including PulteGroup, Ryland Homes, and Lennar Corp., have more than doubled in the past year.
Home-improvement warehouses are back with a vengeance. Home Depot (NYSE: HD) is up 26 percent since the beginning of the year. Builder’s FirstSource (NASDAQ: BLDR) is up a whopping 80 percent since the start of the year, while Lumber Liquidators Holdings (NYSE: LL), which sells hardwood flooring, is up 146 percent.
But what happened to Lowe’s (NYSE: LOW)? This home-improvement retail store, a competitor to Home Depot, is up only 5.8 percent since the start of the year.
In other industries, a 5 percent rise isn’t something to scoff at. But relative to Home Depot’s 26 percent and Builder’s First’s 80 percent, Lowes lone single-digit gain stands out.
Is this home improvement giant underperforming? Or is it undervalued?
First, some background: Lowes is the mid-weight contender among the home improvement pack. With a market cap of $31 billion, it pales in comparison to heavyweight Home Depot, which has a market cap of $81 billion. But other competitors are much smaller: Lumber Liquidators has a market cap of only $1.1 billion while Builder’s FirstSource carries a mere $355 million.
For obvious reasons, it’s easier for small companies to show fast growth, so Lowes’ slower gains relative to Builder's First and Lumber should be understood in their relative context. But Lowes’ near-stagnation compared to Home Depot’s performance raises eyebrows.
Lowes vs. Home Depot
Both Home Depot and Lowes have taken similar actions this year. Both offer their investors similar dividend yields (2.1 and 2.3 percent, respectively). Both started 2012 with a goal of driving growth through acquisitions: Lowes bought Washington-based online retailer ATG Stores a few days before New Years, while Home Depot acquired Redbeacon in January.
But while their actions are similar, their performance is disparate. Home Depot is enjoying a 5.8 percent same-store growth rate, while Lowe’s is experiencing same-store growth at 1 to 3 percent.
Their current stock prices reflect this performance, but it hasn’t always been so bad for this blue-and-white retail chain. Lowes is substantially off the 52-week high it enjoyed in April, despite the fact that Home Depot and its other competitors continue to remain at their peak. And despite Lowes’ newly-tanked stock price, it trades at a similar P/E to Home Depot – 17.7 and 20, respectively. The only conclusion I can reach is Lowe’s is underperforming. Or perhaps it’s overvalued. Take your pick.
Either way, Home Depot is the better buy, thanks to its higher same-store sales growth, a similar P/E, and its stabilizing market cap heavyweight.
That said, I believe the best time to buy Home Depot was six months ago. I wouldn’t touch it today at its current prices. But I’d also wait for Lowes to fall further before I tried to scoop it up as a value buy. Housing might be improving, but Lowe's needs to show stronger sales before I’m convinced that the new construction starts have trickled into its doors.
PaulaPant has no positions in the stocks mentioned above. The Motley Fool owns shares of Lumber Liquidators. Motley Fool newsletter services recommend Lumber Liquidators and The Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.