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Is Lowe's Stock a Buy?

By Jennifer Saibil - Apr 19, 2021 at 6:30AM

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The home improvement retailer had a high-growth 2020. Can it keep it up?

In some ways, 2020 was a year divided between the great and the not so great, with the COVID-19 pandemic predominantly determining which side of the divide companies were classified into. But in other ways, it was a distortion of what goes on during a normal year, and we can expect 2021 to look a lot different.

Many companies had their best growth ever, and that's likely to come back down to earth, while others suffered and are getting back on track. 

Lowe's (LOW 0.76%) had a fantastic year, beating out rival and industry leader Home Depot (HD -0.11%) in sales growth. But what will happen next year, and should you buy today?

A worker in a home improvement store.

Image source: Getty Images.

Catching up to the top spot

Just over a year ago, in the 2019 fourth quarter, Lowe's was struggling with an out-of-date digital program and only 3% digital growth. Comps were only 2.5%.

But the home improvement company was investing in technology to fuel higher growth as well as building out new infrastructure to improve its supply chain.

These changes helped the company to score high comps and digital sales throughout the pandemic.

Metric (YoY) Q1 2020 Q2 2020 Q3 2020 Q4 2020
U.S. comps growth 12.3% 35% 30% 29%
U.S. digital growth 80% 135% 106% 121%

Data source: Lowe's quarterly reports. YoY=year over year. 

Sustaining momentum this year

Lowe's sees a $900 billion home improvement market of which it has about 10%, and is working on several new initiatives to keep up the momentum in 2021 and beyond.

The most urgent is expanding its omnichannel capabilities. This is why it flourished throughout the pandemic, and if it has a chance at succeeding in its aftermath, adding new features is crucial. Some of the features it's developing are same-day services and greater store-order fulfillment.

The company is adding online-only products as well as a larger assortment of products in general,and it's focusing on productivity and improving its supply chain network to drive cost efficiency. (Operating margin expanded in the fourth quarter from 1.5% to 7.5%, and for the full year from 2% to 10.8%.)

Lowe's is bolstering its professional segment with tool rentals, new professional-grade brands, and an expanded pro membership program. The pro segment is one of its competitive advantages, and shoring up this category is a key to driving sales.

Finally, Lowe's is expanding its private brands, which has been a very successful strategy for retailer Target (TGT -0.54%). Private brands can increase profitability, and the company can have greater control over the supply chain. This is a development to watch.

Challenges along the way

The main challenge for Lowe's in the coming year is a potential drop-off in home improvement sales, which have been elevated as people stayed home and worked on home improvement projects. That is expected to taper off as economies reopen and people start spending in areas that were limited last year, such as travel.

The company modeled three scenarios for 2021: a robust market with a 2% sales decline; a moderate market with a 5% decline; and a weak market with a 7% decline.Regardless of the outcome, Lowe's is expecting some pressure over the next year. Putting that into perspective though, the company has already demonstrated that it's on track to gain market share, and it will continue to reap benefits from its investments in technology and supply chain.

Lowe's is a dividend king, and it has raised its dividend for the past 57 years. Its dividend yields 1.15%. Lowe's stock gained 174% over the past five years.

The company is making moves to increase market share and sustain growth, and these moves are producing results. I recommend Lowe's as a value pick to add stability to your portfolio.

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Stocks Mentioned

Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$184.22 (0.76%) $1.38
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$282.69 (-0.11%) $0.31
Target Corporation Stock Quote
Target Corporation
$149.61 (-0.54%) $0.81

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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