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Why Lowe's Companies, Inc. Stock Rose 11% in 2015

By Demitri Kalogeropoulos - Jan 12, 2016 at 9:57AM

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Beating the market by double digits is normally great news, but not when compared to rival Home Depot's performance.

What: Home-improvement retailer Lowe's (LOW 0.97%) stock gained 11% in 2015, according to S&P Capital IQ data. The bounce put shareholders significantly ahead of the broader market, which fell by 1% last year.

LOW Chart

LOW data by YCharts.

Yet many investors may have been disappointed with that result, given that larger rival Home Depot's (HD 0.82%) stock spiked 26% in 2015.

So what: Of course, Lowe's benefited from the same virtuous trends that recently sent Home Depot's operating results into record territory. As housing prices inched higher, spending on home improvement rose to an annual pace of $600 billion last year -- up dramatically from the $380 billion low set in 2010.

Image source: Lowe's.

That sharply growing industry has powered a broad-based uptick in sales: Lowe's posted growth in each of its 14 geographical regions -- and in 12 of its 13 product categories -- in the third quarter. Comparable-store sales rose by a healthy 5%, and profitability improved as well, with operating margin ticking up to 9%.

Yet Lowe's was beaten in each of those metrics by its main national competitor.

Home Depot posted a whopping 7% comps gain in Q3 as its operating margin improved to 13%.

LOW Operating Margin (TTM) Chart

LOW Operating Margin (TTM) data by YCharts.

Now what: While Home Depot has been capturing more than its fair share of the gains in the home-improvement market, that still leaves plenty of room for Lowe's to grow. CEO Robert Niblock and his executive team are particularly encouraged by the strong rise they're seeing in both customer traffic and average spending. That's why they recently affirmed their full-year profit guidance that calls for earnings of $3.29 per share in 2015, or 21% better than the prior year's result.

Lowe's stock is valued at 22 times expected earnings, a discount from Home Depot's current 24 times earnings valuation. Given its higher profitability, it's understandable that investors would pay a premium for Home Depot these days.

Yet both companies are likely to raise their dividends significantly in 2016 while posting continued hefty sales and profit gains. "The forecast for key drivers of the home improvement industry remain conducive for growth at least through 2017," Niblock said in a recent conference call with investors.

Demitrios Kalogeropoulos owns shares of Home Depot. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$199.08 (0.97%) $1.92
The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$309.69 (0.82%) $2.52

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

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