After Lowe’s (LOW) and Home Depot (HD) reported their Q1 results, there was no shortage of analysts who came out stating Lowe’s was a better value with more upside than Home Depot. They argued that the softness that the company experienced in Q1 was entirely weather-related, and Lowe’s has way more runway to capture market share. From the investments the company continues to make in its logistics and supply chain to the growth with their Pro Customer base, the Lowe’s bulls saw the dominance by Home Depot as coming quickly to a close.
However, putting Lowe’s value, efficiency, and growth into context, it becomes clear that unless Lowe’s starts growing its revenues at a double-digit pace, they will continue to be second choices stock.
The Lowe’s Value Trap Illusion
If an investor quickly looked at a comparison of some basic valuation and profitability measurements for Lowe’s vs. Home Depot, they might be inclined to think Lowe’s is a bit of value. They trade at a lower multiple on P/E, Price/Sales, Price to Cash Flow, Price to Earnings Growth, even Price to Forecasted earnings. Further, Lowe’s delivers a gross margin that’s nearly identical to Home Depot’s.
Going a bit deeper, the company offers $5.42 Tangible book per share, or effectively 5.5% of the current share price. Cash flow is $6.48 per share or approximately 6.5% of the current share price compared to Home Depot who offers $3.02 per share or 1.5% of the current share price. To most value investors, the protection that Lowe’s seems to provide for a growing retailer would be extremely appealing. Yet, looking into the numbers a bit closer, we find that there are significant reasons why Lowe’s shares are priced as they are, namely productivity and growth.
Going a bit deeper, the company offers $5.42 Tangible book per share, or effectively 5.5% of the current share price. Cash flow is $6.48 per share or approximately 6.5% of the current share price compared to Home Depot who offers $3.02 per share or 1.5% of the current share price. To most value investors, the protection that Lowe’s seems to provide for a growing retailer would be extremely appealing. Yet, looking into the numbers a bit closer, we find that there are significant reasons why Lowe’s shares are priced as they are, namely productivity and growth.
