They say a rising tide lifts all boats, and for Lowe's (LOW 0.63%) this appears to be the case. The strong housing market, supported by low interest rates and short supply, is driving demand for the types of products this home-improvement chain offers.
Even with this attractive backdrop, Lowe's stock currently sells at a bargain price today, sporting a forward price-to-earnings (P/E) ratio of just 18. This is significantly less than the S&P 500, which trades at 22. But Lowe's isn't just a value play; it's also a high-quality company that is making the right strategic moves.
Here's why this cheap home-improvement retailer could be a smart buy today.
Image source: Getty Images.
Catching up to big brother
Lowe's is a massive business, generating sales of $94.6 billion over the past 12 months. While that's smaller than rival Home Depot's (HD 0.74%)$144 billion over the same period, Lowe's is doing the right things to up its pace in the industry.
Joe McFarland, executive vice president of stores, boldly claimed on the recent earnings call that "We are striving to demonstrate that Lowe's is the new home for pros." About 25% of Lowe's business today comes from these small contractors, who are extremely valuable because they visit and spend much more than the do-it-yourself (DIY) customer. Nearly half of Home Depot's revenue comes from its pros, so Lowe's still has a lot of room to grow.
During the most recent quarter, management highlighted that pro demand grew 21% year over year and 49% from the second quarter of 2019. This is remarkable given that Lowe's overall sales were essentially flat compared to its year-ago level. So the business is making great strides attracting this essential customer, utilizing initiatives like new store layouts, improved inventory management, and a better digital experience.
All of this should help Lowe's achieve even better financial metrics. Having a higher proportion of business coming from pros will mean greater sales per square foot, a wider operating margin, better return on invested capital, and ultimately higher profit. And Lowe's average ticket size of $93.68 is already 13.6% higher than Home Depot's.
Lowe's is absolutely making the right move by focusing intensely on gaining market share in the pro segment. The pandemic has forced many Americans to reconsider their living situations, particularly because of the popularity of remote work. No longer forced to live near a crowded urban area, consumers will continue flocking further away from cities. A bigger house -- with a home office -- should propel demand for Lowe's for years to come.
Booming digital business
Part of improving the shopping experience is bolstering digital capabilities, and Lowe's has done just that. Recently, the company moved its Lowe's for Pros loyalty program to the cloud, which will allow for enhanced features, personalized offers, and faster updates. Over the past two years, sales on Lowes.com have increased a whopping 151%, showing that the technological updates seem to be working.
Lowe's is finding that digital and physical shopping often go hand in hand. In fact, some 60% of online orders were actually picked up at a store. Customers now expect an omnichannel shopping experience, often starting an order on their phone or laptop and completing it at a physical location. In many cases, that's because they need tools and supplies immediately to complete renovation projects. That's especially true for the pros. It's no wonder that Lowe's has been able to defend itself from the likes of e-commerce behemoth Amazon in recent years.
It's clear that Lowe's deserves a higher valuation multiple than the market is giving it today. Therefore, investors should seriously consider adding shares in this top home-improvement chain to get that rare combination of value and quality.
