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Why Lowe’s Is No Longer Expensive

Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With another quarter in the books for home improvement giant Lowe’s (NYSE: LOW), the company continues to make the case as to why it is the better value than rival Home Depot (NYSE: HD). Although both companies have traded neck-and-neck since the crash of the housing bubble, 2013 may prove to be the year that one of these two giants creates separation from the other. Lowe’s solid Q3 performance is certainly a step in that direction.

The Quarter That Was

Third quarter revenues arrived at $12.07 billion - almost a 2% increase year-over-year and beating analysts’ estimates of $11.92 billion. Revenue growth was fueled by same store sales, which increased by 1.8%. Same store sales arrived particularly impressive because it followed a quarter during which revenue from comps dropped by 0.4%.

By comparison, Home Depot produced 4.5% revenue growth as sales reached $18.1 billion – beating estimates of $17.8 billion. The company earned $947 million in net income – representing a year-over-year growth of 1.4%. So it seem that Lowe's still lags behind Home Depot in some important metrics, including comps where Home Depot as outperformed by 4.2%.

While there are quite of bit of factors that determine the degree to which comps can grow, does this mean that Home Depot is executing better? However, that Lowes’ logged $376 million in net income, which grew 76% year-over-year makes this a hard argument to make since Home Depot’s profit inched up by (only) 1.4%. 

Likewise, earnings per share soared 94.4% to $0.35 per diluted share. Earnings was impacted by a charge of $85 million, which the company absorbed due to asset impairments and discontinues projects. These impacted EPS by $0.05. Still, adjusted non-GAAP earnings per share managed to climb 11% to $0.40.

Likewise, profitability continues to trend in the right direction. The company saw a 15 basis point improvement in gross margin while adjusted operating income climbed almost 3%. This has helped the company from the standpoint of cash flow, which the company has amassed $3.5 billion worth so far on the year.

With its cash, the company announced the retirement of almost 30 million shares valued at $850 million. This has brought its total for the first nine months to over 124 million shares for $3.6 billion. For the performance the company’s CEO, Robert Niblock offered this:

We are keenly focused on improving our core business. Our level of execution is improving and we delivered solid results in the third quarter. I would like to thank our employees for their continued dedication and customer focus."

Moving forward

Although Lowe’s kept its full-year earnings guidance of $1.64 per share, the company did raise its full-year comps guidance to 1% from 0.5%. Likewise, revenue for the full-year was raised by 1% to 2%. These are certainly not over-the-top projections, but the company deserves credit for making the best out of a bad situation.

Also, considering that home prices still have not fully recovered in most parts of the U.S. while housing starts remain somewhat depressed, it stands to reason that Lowe’s as well as Home Depot will benefit immensely once the market fully recovers. In the meantime, the stock has shown some strength – climbing year to date by 34%.

Bottom Line

There’s a lot to like with Lowe’s at this level. I think the stock presents more growth potential than Home Depot – if for no other reason than the fact that Lowe’s has less it needs to do to excite investors. While that might sound a bit cynical – it’s not. The valuations of both companies are the same. On the other hand, Home Depot’s recent performance has exceeded Lowe’s and (fairly or unfairly) it’s become routine.

If Lowe’s can produce a couple of beat and raise quarters in 2013 and if the housing market shows better than expected signs of recovery, this stock can easily approach the $40 to $45 range during the course of the next 6-12 months.


rsaintvilus has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Home Depot and Lowe's Companies. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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