After a disappointing day of earnings for home improvement retailer Home Depot (HD) - Get Report , key peer Lowe's (LOW) - Get Report delivered much more encouraging results on Wednesday. To be fair, Lowe's revenues failed to meet analysts' expectations. However, adjusted EPS came in ahead of consensus, while the full-year margin and earnings outlook was raised to match current consensus at the mid-point of the guidance range.
It's About Lowe's Execution
Not surprisingly, the management team cited a supportive underlying macro landscape, including job growth, wage increase and home price appreciation, as positive factors that helped the company produce solid 3% comps in the U.S. market. But rather than being a mere beneficiary of a "tide lifting all boats" story, it looks like Lowe's deserves more credit for pulling together a strong third quarter.
Since CEO Marvin Ellison took over as company CEO in 2018, the retailer has worked hard to improve its operations and financial performance. The efforts have started to bear fruit, as all divisions have been producing positive comps on the back of increased foot traffic and ticket size. The Pro consumer vertical is doing very well, while merchandise categories like decor and paint have been staging a recovery after many quarters of underachievement.
A total company comparable-store sales increase of 2.2% in the most recent quarter ending Nov. 1, unimpressive at first glance compared to consensus estimate of 3.2%, understates the strong results in Lowe's core business: U.S. brick and mortar. Comps are likely to improve substantially, perhaps starting in the fourth quarter, as the company continues to address issues associated with a lackluster Canada business and an online channel that is still under construction. Meanwhile, total revenue growth should soon benefit from the lapping of the Orchard Supply Hardware closure.
Contributing even more to earnings growth, Lowe's margins expanded significantly in the quarter after dropping sharply in the previous four quarters. The feat was accomplished despite higher tariffs, some supply chain pressures and continued softness in lumber pricing -- the latter a headwind that should subside in the next few months.
At play here is the positive impact of Lowe's year-old transformation efforts. As Lowe's gets its house in order, with internal IT systems put in place, the digital channel up and running and store footprint right-sized, profitability should continue to improve.
More Appealing Than Home Depot
At the end of another chapter in the battle for home improvement retail dominance, Lowe's comes out one or two steps ahead of Home Depot -- at least in terns of its appeal of an investment in the company's stock. The Mooresville, North Carolina-based company is not only producing better top-line results, but it is successfully executing on its transformation plans and generating bottom-line growth through margin expansion.
Better yet, and despite the stock's 29% price appreciation in 2019 so far, Lowe's is also valued less aggressively, at a forward P/E of less than 18x compared to Home Depot's 20.4x. Add to the equation long-term EPS growth expectations of nearly 20%, which is twice as high as that of its key peer, and Lowe's starts to look like a very compelling buy at current levels.
The author has no positions in any stocks mentioned in this article.