Lowe's (LOW +1.17%) benefits from consumers spending more on home improvement as they are spending more time at home. Sales are surging in fiscal 2020. That streak appears likely to continue as the company is deemed an essential retailer and will likely be allowed to remain open during the most recent surge in coronavirus cases. Meanwhile, many other businesses are being asked to close their doors, and consumers have fewer options on where they can spend time and money.
Positive news on the deployment of a coronavirus vaccine means that the pandemic may end sometime in 2021. And while the company has done extremely well during the pandemic, it remains to be seen if it can carry that momentum when there is a return to normalcy. Let's take a closer look at its prospects and the company's valuations to determine if now is a good time to buy Lowe's stock.
Image source: Getty images.
Prospects
The home is now a bigger part of people's lives -- at times serving as a school for children, an office for parents, and an entertainment venue for all. And frequently, all of these activities are happening simultaneously.
For many people, their home was not prepared to handle the additional needs. This required getting creative and adapting existing spaces to fulfill new purposes, or adding new spaces entirely. The good news for Lowe's shareholders is that these new adjustments will require maintenance.
Some of those living in apartments realize that their current space cannot accommodate their needs no matter how creative they get in moving things around. These families are buying homes in large numbers and driving the homeownership rate in the U.S to near-record highs. Homeowners tend to spend more on improvements than renters do, and some portion of these new homeowners are sure to go to Lowe's.
The competition
When it comes to profit margins and cash flows, Home Depot (HD +1.13%) is outperforming Lowe's (see chart below). Undoubtedly, Home Depot is the leader in the industry, but Lowe's is not conceding. In the third-quarter conference call, the company highlighted the steps it is taking to improve performance.
Specifically, Lowe's made investments to expand availability for buying online and picking up in-store at lockers or curbside. This will help boost sales in the near term as people favor contact-less options, and it might have a lingering long-term positive effect. The company also started a multiyear rollout of a tool-rental program to attract more professional customers. That will have more of a long-term benefit as people start to feel more comfortable allowing workers into their homes when the pandemic fades away.
Data source: Ycharts.
Is Lowe's stock cheap?
Management seems to think the stock is undervalued. The company's press release at the end of its third quarter said that it was expecting to repurchase $3 billion of its stock in the fourth quarter. Moreover, a few days following that report, the company announced it would add $15 billion to the existing share buyback program extending beyond the fourth quarter with no time limit.
EBITDA = earnings before interest, taxes, depreciation, and amortization. Data source: Ycharts.
Lowe's is trading at a substantial discount to its competitor Home Depot when comparing three important metrics (see chart above). The premium for Home Depot may be justified considering it is the superior performer on profit margins. Still, investors who are bullish on the home improvement market have an opportunity with Lowe's to buy into a consumer discretionary stock with excellent near-term prospects, selling at a relatively fair valuation.
