This cheap stock could be a smart buy today
They say that a rising tide lifts all boats, and for Lowe’s (NYSE: LOW) this appears to be the case. The strength of the housing market, supported by low interest rates and limited supply, is driving demand for the types of products offered by this home improvement chain.
Even against this attractive backdrop, Lowe’s shares are currently selling cheaply today, sporting a price / benefit (P / E) of only 18. This is significantly less than the S&P 500, which trades at 22. But Lowe’s isn’t just a value game; it is also a quality company that makes the right strategic decisions.
Here’s why this cheap renovation retailer could be a smart buy today.
Catch up with your big brother
Lowe’s is a massive company, generating sales of $ 94.6 billion in the past 12 months. While it’s smaller than its rival Home deposit‘s (NYSE: HD)$ 144 billion over the same period, Lowe’s is doing what it takes to accelerate its pace in the industry.
Joe McFarland, executive vice president of stores, boldly asserted on the recent earnings call that “We strive to demonstrate that Lowe’s is the new home for the pros.” Today, around 25% of Lowe’s business comes from these small contractors, who are extremely valuable as they visit and spend a lot more than DIY customers. Almost half of Home Depot’s income comes from its professionals, so Lowe’s still has plenty of room to grow.
During the last quarter, management pointed out that professional demand increased 21% year-on-year and 49% from the second quarter of 2019. This is remarkable given that Lowe’s overall sales were essentially flat compared to 2019. at their level a year ago. The company is therefore making great strides in attracting this essential customer, using initiatives such as 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 from pros will mean higher sales per square foot, a larger operating margin, a better return on your investment, and ultimately higher profits. And Lowe’s average ticket size of $ 93.68 is already 13.6% larger than Home Depot’s.
Lowe’s is absolutely making the right choice by focusing intensely on gaining market share in the professional segment. The pandemic has forced many Americans to reconsider their living conditions, especially due to the popularity of remote working. No longer forced to live near a crowded urban area, consumers will continue to flock further from cities. A bigger house – with a home office – should drive demand for Lowe’s for the coming years.
Booming digital business
Part of improving the shopping experience is building digital capabilities, and that’s exactly what Lowe’s did. Recently, the company moved its Lowe’s for Pros loyalty program to the cloud, which will allow improved features, personalized offers and faster updates. Over the past two years, sales on Lowes.com have increased 151%, showing that technology updates seem to be working.
Lowe’s finds that digital and physical purchases often go hand in hand. In fact, around 60% of online orders were picked up in-store. Customers now expect an omnichannel shopping experience, often starting an order on their phone or laptop and completing it in a physical location. In many cases, this is because they need tools and supplies immediately to complete their home improvement projects. This is especially true for the pros. It’s no wonder that Lowe’s was able to defend itself against e-commerce giants like Amazon in recent years.
It is clear that Lowe’s deserves a higher valuation multiple than the market gives it today. Therefore, investors should seriously consider adding stocks to this home improvement chain to get that rare combination of value and quality.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.