Lowe's Companies (LOW -1.40%) and Tractor Supply (TSCO 0.85%) don't compete directly, but they share many similarities as investments. The two retailers are highly profitable and have been steadily boosting market share in competitive industry niches. And strong cash flow in each business has powered ample cash returns through dividends and stock buyback spending.
But which one is the better buy right now? Let's take a closer look.
The better growth story
Fans of growth stocks will find more to like about Tractor Supply today. Sure, the rural lifestyle retailer missed sales expectations in the most recent quarter. But comparable-store sales are still projected to rise by as much as 6% in 2023 following last year's 6.3% increase. Tractor Supply is seeing a healthy balance today between rising customer traffic and increased average spending.
Lowe's, on the other hand, just reduced its 2023 outlook and is likely to post a second straight year of declining customer traffic. The home improvement giant's main challenge is softening do-it-yourself demand in the industry following two years of outsized demand gains. Its sales base is still much larger than it was before the pandemic, but the growth hangover isn't likely to end quickly.
Profits and cash
Lowe's is more profitable, but the performance gap is shrinking. The company is projecting an operating margin of about 13.5% this year, or about a full percentage point below industry leader Home Depot. Tractor Supply is on track for a third consecutive year of roughly 10% operating profit, keeping it well above more comparable peers like Target and Walmart.
LOW Operating Margin (TTM) data by YCharts
Lowe's also takes the edge on cash returns. The company has steadily increased its annual dividend payment for nearly 50 years, in fact. Management aims to return 35% of earnings to shareholders each year through that channel, with more arriving through stock buybacks. Tractor Supply's cash returns aren't as generous due to the company's focus on expanding its business today.
Price and value
Lowe's is valued at a discount compared to Tractor Supply and Home Depot. You can buy the stock for 1.3 times annual sales while Tractor Supply's ratio is closer to 1.7 and Home Depot's is just below 2. Lowe's is also slightly cheaper on a price-to-earnings basis.
Most investors will prefer Tractor Supply stock here, though, given its bright growth outlook, stable profitability, and potential for store expansion over the next several years. The rural lifestyle specialist has a good shot at leading its niche, too, while Lowe's consistently trails its larger rival Home Depot in key areas like growth, profit margin, and dividend payments.
While you'll have to pay a premium for the stock, Tractor Supply delivers several attractive investment characteristics that should pay off over the long term. The next few quarters could be volatile for the business, especially if a recession develops in late 2023. But shareholders are likely to benefit from many years of market share growth, strong earnings and cash flow, and increasing returns from dividends and stock buybacks.
