Lowe's Will Never Stop Improving and Remains a Strong Buy

 

NEW YORK (TheStreet) – "Never stop improving" is Lowe's (LOW) motto and management understands what it must do to satisfy Wall Street's appetite for profits. The company has begun to lay the foundation.

The stock closed Monday at $50.45, up 1.8% on the year to date, besting the 0.26% decline posted by the home improvement sector. Rival Home Depot (HD)  has posted gains of just 2.7% in 2014. That's part of Lowe's problem.

You see, it doesn't matter how well Lowe's performs. The company will always be measured by how well Home Depot does. This is a pattern frustrated Lowe's shareholders know all too well -- analysts can't stop pulling out the measuring tape. Fairly or unfairly, that's Lowe's reality.

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What I think is more important consider is the extent to which the U.S. housing market will continue to rebound. Unless investors believe another collapse is imminent there should be plenty of business for both Lowe's and Home Depot to prosper. This is not, however, how Wall Street is evaluation Lowe's.

With the stock trading at around $50 per share, Lowe's is valued at a price-to-sales ratio of 0.9. Consider, this is 50 basis points below the industry average P/S of 1.44. And 1.44 is exactly where Home Depot is priced at.

In my view, management's recent guidance, which includes 4% increase in same-store sales and a 65-basis point jump in operating margin, tells another story. Management expects to make the sort of growth and efficiency improvements that makes Lowe's a solid investment. On the basis of long-term revenue and margins expansion, these shares should be worth $55 to $60 in the next 12 to 18 months.

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