Is Lowe’s Stock Overvalued?

Lowe’s Companies Inc (NYSE:LOW) stock is at an all-time high in the coronavirus’s aftermath pandemic. Global stay-at-home orders that caused consumers to rush on home improvement supplies drove much of this.

Everything from gardening to remodeling helped people create the perfect home office environment to work and go to school from. As people completed their DIY projects, both Lowe’s and competitor Home Depot Inc (NYSE:HD) saw market prices skyrocket. But is Lowe’s stock overvalued?

Lowe’s market capitalization of around $130 billion pales compared to Home Depot’s $300 billion plus market cap but it’s on track to grow rapidly.It has a lot invested in ecommerce and other digital initiatives too, like its augmented reality app that helps you see how new furniture or even new colors would fit into your home.

The surge in home improvement benefited the company so far, but let’s look at how it plans to sustain this success into the 2020 holiday season and beyond. Here’s what you need to know about investing in Lowe’s.

Why Lowe’s Stock Went Up

The power behind Lowe’s lies in its strategic investments and competent management that steered it through the coronavirus pandemic. Its brick-and-mortar stores are among the few in the retail industry that saw a bump in sales.

While the rest of the sector faced mass employee furloughs, trouble paying rent, and store (or even company) closures, Lowe’s gained customer traffic and revenues.

In fact, its most recent earnings report shows its second quarter earnings for 2020 were $27.3 billion, up from $21.0 billion in the same quarter of 2019.

First quarter sales surged by 11 percent too. This helped the fuel a steady gain throughout the year.

It took several steps over the past five years to improve its bottom line and overcome larger rival Home Depot. This includes an aggressive digital strategy and a push to gain more of the professional contractor market.

Lowe’s is banking its upcoming holiday sales on cross sales in a variety of new categories, including kitchen appliances, scooters, and home bedding.

It’s also offering free Christmas tree and wreath delivery to meet expected market needs during the first holiday season of the social distancing age.

It’s also stretching out its traditional Black Friday sale, called PROvember, throughout the entire month of November, which should keep sales hot heading into the end of the year.

Next, let’s analyze the company’s financial statements.

Lowe’s Financials Improved In Spite Of The Pandemic

Lowe’s reported its second quarter earnings in mid-August. It showed a diluted earnings per share of $3.74, which is an increase of 75 percent from the prior year.

Net earnings were $2.8 billion, compared to $1.7 billion in the same quarter of 2019. Total sales were $27.3 billion, showing strong need for the business during the municipal shelter-in-place orders issued throughout the country.

It spent $460 million during the quarter to help keep frontline workers safe, and another $560 million on COVID-related associate support, along with $100 million in community pandemic relief. These steps helped turn a crisis into a good PR situation for the brand.

As of July 31, 2020, Lowe’s has 1,968 retail stores across the U.S. and Canada, accounting for 208 million square feet of selling space.

It paid out a $0.55 dividend per share for both quarters in the first half of 2020, which were the worst of the pandemic.

Its total assets are at $51.763 billion, with $47.407 in total liabilities. Its cash and cash equivalent reserves stand at $11.641 billion heading into the second half of the year. With a market cap over $125 billion, some wonder if the stock is priced fairly.

Is Lowe’s Valuation Too High?

Lowe’s $125 billion market cap gives is a P/E ratio of 22.67. While this seems high, it’s a better value than Home Depot, which has over a $300 billion market cap and a P/E ratio of 25.80. Bullish investors believe the company has plenty of growth room without hitting its ceiling.

Even though Home Depot is competing with it on every end, Lowe’s has been mostly on the upswing for the past 20 years, with the 2010s showing sped up growth.

While the company’s stock price plummeted to a low of $60 per share with the rest of the market during the 2020 coronavirus crash, it quickly rebounded and is trading for nearly three times that amount at the end of the year.

This tripled growth may be hard to maintain as the rest of the retail market adjusts and attempts to horn in on the company’s expansion plans.

It hit the $180 mark already by the end of October, and it could sustain this growth through the rest of the year with a positive Q3 earnings report in November.

The only real question is whether Lowe’s will drop in 2021 when government stimulus protections run out and consumers get even more strapped for cash.

Will Lowe’s Stock Drop?

Lowe’s is experiencing a historic high market cap in 2020, and it earned its way there by providing essential goods during the pandemic.

Now that the initial onslaught is over and life is returning to a sense of normalcy, it’s unclear if the company can maintain its growth. It’s already focusing its investment efforts into expanding its product lines and increasing average customer spend per sale.

If it can keep this up, it’ll have great earnings reports through the fourth quarter of 2020, scheduled for reporting in February. After that point, it could go down.

However, bullish investors maintain that Lowe’s is a great long-term investment, and some even recommend it over Home Depot.

Is Lowes’s Stock Overvalued? The Bottom Line

Lowe’s is a home improvement retailer that became the belle of the ball amid the coronavirus pandemic. Sales for both quarters in the first half gained on the previous year, and it’s valued better than its rival Home Depot heading into the holiday season. The company is taking steps to ensure a positive cash flow during the holidays, and most analysts believe it can succeed.

The lingering question is what will happen next year when government protections run out and it forces the economy to fend for itself.

Even if Lowe’s does drop, it could still outperform the general market. Its excellent management, strong strategic investments, and profitable retail footprint mean it’s likely to weather any storm coming in the next five years.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.