Lowe's (LOW) Off To Solid Start In 2018, Outpaces S&P 500

Only 12 trading sessions so far in the year, and Lowe's Companies, Inc. (NYSE:LOW) is off to a solid start. Of late, this home improvement company has been one of the most talked about stocks in the Wall Street thanks to D.E. Shaw, an activist investor, who built an active stake in this Mooresville, NC-based company. While the news led the stock to march ahead in the bourses, analysts were quick to point that the company is not devoid of potential.

A glimpse of Lowe's share price movement reveals that it has increased roughly 9.1% year to date, outperforming the industry’s growth of 5.7% and S&P 500’s advance of approximately 4.8%. Additionally, the stock’s long-term earnings growth rate of 14.8% and a VGM Score of A reflect its inherent strength.

Catalysts Working Behind the Stock

We believe improving job scenario, housing market recovery, merchandising initiatives and post hurricane construction activities along with efforts to enhance omni-channel capabilities bode well for Lowe’s. The company’s Canadian business has been performing quite well. The buyout of RONA is reinforcing its position in the Canadian market.

Further, Lowe's Canada entered into a strategic partnership with Solar Brokers Canada to provide solar energy installation services to homeowners under Lowe's Solar banner. Of late, the company has been focusing on maintenance, repair and operations products, evident from its acquisition of Maintenance Supply Headquarters and also the earlier buyout of Central Wholesalers.

Further, the company is streamlining store portfolio, which along with its strategy of enhancing customer shopping experience and merchandising transformation, is likely to generate incremental sales. We noted that comparable sales (comps) rose 5.7% during the third quarter, following an increase of 4.5% and 1.9% recorded in the second and first quarter, respectively. Lowe's, which competes with Home Depot (NYSE:HD) , continues to project total sales growth of approximately 5% with comps increase of about 3.5% during fiscal 2017.

Stock Looks Attractive From Valuation Perspective

A brief glance at some valuation metrics seems to indicate that Lowe's has enough room to run. Further, a Value Score of B also indicates the same.

Lowe's with a price to sales ratio of 1.2 compared with that of industry’s 1.6 indicate that the stock has enough upside potential. The stock also looks attractive with respect to a price-to-book (P/E) multiple of 14.7x compared with industry’s 28.4x. A more-or-less similar picture emerges when comparing EV/EBITDA ratios. Lowe's holds the edge here with an EV/EBITDA ratio of 11.5 lower than 11.7 for the industry.

We noted that this Zacks Rank #3 (Hold) stock has surged 41% in a year. So investors with a long-term horizon may hold on to the stock.

2 Key Picks

Beacon Roofing Supply, Inc. (NASDAQ:BECN) delivered an average positive earnings surprise of 6.4% in the trailing four quarters. It has a long-term earnings growth rate of 15% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lumber Liquidators Holdings, Inc. (NYSE:LL) has a long-term earnings growth rate of 27.5% and a Zacks Rank #2 (Buy).

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