Lowe's Story Is Growing on Wall Street - TheStreet

Sure,

Home Depot

(HD) - Get Report

is the household name. But if you're looking to profit from the Mr. Fixit fad,

Lowe's

(LOW) - Get Report

is your stock, some analysts say.

A variety of macroeconomic factors portend good times ahead for all home-improvement retailers, including lower interest rates and a surprisingly resilient home market. But Lowe's, with its vast expansion potential and cheaper stock, is a better bet for investors than bellwether Home Depot. That, at least, is the tune being sung by some Wall Street analysts.

Take Donald Trott, an analyst at

Jefferies

, who last Oct. 8 began advising hedge fund clients to switch out of Home Depot in favor of Lowe's. Anyone who took his advice certainly reaped the benefits: Since then, Home Depot's price has hardly changed -- down slightly from $50.88 to $50.51 at Wednesday's close -- but Lowe's has jumped 73%, while the

S&P 500

index has declined about 10%.

Trott continues to make the recommendation, with a hold rating on Home Depot and a buy rating on Lowe's. "It's a matter of Lowe's being more appealing, based on our projections of earnings growth rates and multiples," he says. (His firm hasn't had a banking relationship with either company.)

Home Run
Lowe's stock outpacing Home Depot

Yet even after Lowe's strong run, the stock still trades at a lower

price-to-earnings ratio than Home Depot. Based on current share prices, Home Depot trades at more than 40 times projected 2002 earnings, while Lowe's trades at less than 30 times earnings estimates. Analysts project both companies will grow at 21% annually over five years, according to

Thomson Financial/First Call

. "We believe Home Depot's projection is optimistic, while Lowe's is conservative," Trott says.

Trend Watching

Valuations aside, analysts note several fundamental advantages of Lowe's business. For example, Wayne Hood, of

Prudential Securities

, notes that several metrics show Lowe's gaining on its competitor. In 2000, he notes, the average Lowe's store sold $31 million worth of goods -- less than Home Depot's $45 million, but reflecting an improvement from previous years. He expects this to continue into 2002, especially as Lowe's moves into larger markets on the East Coast. In addition, he says, Lowe's uses distribution centers, a cheaper method than Home Depot's policy of shipping directly to stores.

"This is particularly important in the current economic environment, with slowing sales," writes Hood, who has a strong buy on Lowe's and a hold rating on Home Depot. (Home Depot still has higher gross margins -- 29.9% in the most recent quarter, compared with 28.3% for Lowe's.)

And consider the two companies' performances in the most recent quarter: Despite the economy's softness, Lowe's saw its net income rise 20% from a year ago, while Home Depot's increased a paltry 0.5%.

Growing on You

Then there is store growth. Atlanta-based Home Depot operates some 1,100 stores in the U.S. and now is turning to global markets such as Mexico. Lowe's, meanwhile, operates 635 stores in the U.S. and is only beginning to dent large metropolitan markets in California, the Mid-Atlantic states and New England -- the areas that most of the nation's money managers inhabit.

"It makes portfolio managers much more receptive," says Trott, who in March attended the grand opening of Lowe's first store in the Boston area and met money managers who liked what they saw. "Lowe's has seven or eight years of ongoing domestic expansion opportunities."

Trott also says that Lowe's, based in Wilkesboro, N.C., hasn't always gotten a fair shake from Wall Street, as its management team is seen as less polished than Home Depot's. "The last time someone said 'these are Southern hicks' was with

Wal-Mart

," he says.

While not all analysts are pushing Lowe's, virtually all are bullish on the home-improvement sector. For example, orders for new homes at the nation's top homebuilders have continually outpaced expectations, despite the cooling economy, notes Aram Rubinson, an analyst at

UBS Warburg

. And, he notes, while lumber prices have weakened slightly recently, that market has still improved from earlier in the year, when low prices were considered a threat to the sector's earnings.

"Recent weakness in lumber should not be perceived as a negative, since prices were not bound to rise indefinitely," he writes. "Additionally, the current levels are more than enough to make for healthy gains throughout the year." (Rubinson has a strong buy on both stocks, and his firm hasn't done underwriting for either company.)

While most analysts are reluctant to steer investors away from Home Depot, perhaps Peter Benedict, analyst at

CIBC World Markets

-- who has a strong buy on Lowe's and a buy on Home Depot and has not done underwriting for either -- sums up the sentiment among Wall Streeters: "I tell you, it's a pretty close race, but there's more upside potential for Lowe's."