Lowe's Companies (NYSE:LOW)’s is in a unique position in an industry that has experienced surging stock prices in the last half of 2014, the home improvement space. Now, I know what you may be thinking, “Home improvement? Hasn’t that ship already sailed?” Not quite! The housing market continues to improve, along with the home improvement industry, as they are directly linked.
First, we will point out why this industry outlook is positive. Then, we will put Lowe’s (LOW - Analyst Report) into focus in order to highlight the fact that it is indeed outperforming the rest of the industry. The position Lowe’s is in right now coupled with the current growth the industry is experiencing sets it up well to outpace earnings expectations and to be a stock worth a closer look for your portfolio in 2015.
The Grass is Greener on the Other Side
Improved Housing Market
People have great reasons to buy homes as of late, sending demand for the sector sharply higher. Among these reasons are the very low interest rates on mortgages and home purchases. People seem aware of the opportunity, as the Housing Market index reflects favorably upon current conditions, measuring 57 in January. Something maintaining the high status of the index in January is present sales, which is at 62. A level above 50 for the index indicates a positive outlook for home sales.
As mentioned earlier, home improvement is directly linked to the housing sector. Of course, this would seem like common sense to most. However, what you may not be aware of is why LOW is the company in the sector that is most likely to give investors healthy returns in light of the positive outlook of the housing market.
Exceeding Industry Performance
Lowe’s is a leader in the home improvement industry. Its only real direct competitor is Home Depot, which downgraded from a Zacks Rank #2 (Buy) to a Zacks Rank #3 (Hold) in the last week. Lowe’s has a 23.5% growth rate for this year, outperforming Home Depot’s (NYSE:HD- Analyst Report) growth rate for this year of 19.4%.
Lowe’s maintains a balanced budget with a debt to equity ratio of 1.01, while Home Depot’s ratio is less favorable with a ratio of 1.65. Indeed, less is more (at least for this ratio). The ratio indicates less leverage being used on Lowe’s part, relying more on the strength of its equity to keep up with liabilities the company is responsible for. In a world where leverage seems to be the preferred option to turn over profits, Lowe’s avoids the risk that comes with leverage by handling its debts responsibly.
The ticker is LOW, but Expectations aren’t!
Since last week, Lowe’s has had its Zacks Rank #3 (Hold) turn into a Zacks Rank #2 (Buy). This is a major factor, as this is an indicator pointing to positive expectations from Lowe’s. The year over year growth estimate for the current quarter is a whopping 40.78%.
Expected EPS growth for the year is 15.73%, beating expected EPS expectations for Home Depot, albeit slightly. The beta on Lowe’s is indeed low at 1.18 while LOW has a 1.35% dividend, suggesting you can expect more security with this already low volatility stock.
Bottom Line
The housing market’s positive momentum has continued into January. As the home improvement industry is directly dependent on results from the housing market, the short term outlook is positive.
Lowe’s is an industry leader with many advantages over its direct competitor, Home Depot.
Investing in Lowe’s has a lower amount of risk associated with it. Lowe’s is expected to grow year over year at a high rate for this quarter. The upside that Lowe’s has going for it makes LOW an interesting ticker to keep an eye on going into the company’s earnings report next month.