Lowe's Earnings Preview: Slightly Cheaper Than Home Depot, With Prospects For Growth

| About: Lowe's Companies, (LOW)


The valuations are pretty similar.

LOW is a little cheaper and seems to have better growth prospects.

Sometimes, pre-earnings, there is no compelling trade.

Lowe's (NYSE:LOW) the home improvement giant that runs neck-and-neck with Home Depot (NYSE:HD) in the DIY (do-it-yourself) home improvement market, will report their fiscal q1 financial results (a day after Home Depot) on Wednesday, May 21, 2014, before the opening bell.

Per Thomson Reuters, the consensus earnings estimate for LOW for q1 is for $0.60 in earnings per share (EPS) on $13.86 billion in revenue for expected year-over-year growth of 22% and 6% respectively.

Both the consensus EPS and revenue estimates have declined from the 4th quarter report, from $0.63 to $0.60 currently and from $14.08 bl to $13.86 bl currently.

Last quarter LOW printed decent results, again, some of which was weather-aided, as comp's rose 3.9%. LOW is finally starting to close the comp gap with HD.

From a financial perspective, there are so many similarities between LOW and HD, but some of the differences I see are the following:

1.) Whereas HD only opened 4 stores in fiscal 2014 (or calendar 2013, depending upon how you frame it), LOW has opened 78 new stores, so the growth potential is there, to a greater extent than HD, however that may be hardware stores as well as bigger box DIY stores. Ive seen two store totals (stores opened) as of Feb '14, 1,760 and 1,832.

2.) Given some of the confusing data around #1, square footage growth for LOW looks to be 1% - 2% per year, versus flat to down for HD over the last few years;

3.) LOW has consistently "under comp'ed" HD over the last 3 years, but that comp underperformance has begun to change, and LOW may start matching or even exceeding HD comp's after theire re-merchandising initiatives;

4.) While HD is trading at 1.4(x) price to 4q trailing sales, LOW is still trading under 1(x) price to sales.

5.) The one metric that worries me about LOW is that "capex" has been reduced by 50% the last 10 quarters, while for HD capex has remained fairly stable;

From a valuation perspective, the two stocks are pretty close, with both stocks pretty fairly valued, with maybe a slight edge to LOW versus HD in terms of the discount to intrinsic value.

Just like HD, LOW's expected three-year EPS growth rate average is 15%, on a 3-year 5% average revenue expectation, and with the stock trading at 19(x) the calendar 2014 estimate.

Just like HD, LOW is trading at 13(x) cash-flow and roughly 15(x) free-cash-flow and has returned a ton of capital to shareholders over the last 3 years: by our internal spreadsheet, in the last 3 years or 12 quarters, $13.1 billion has been returned to shareholders, 75% to 80% of that in the form of share repurchases.

LOW's dividend payout ratio is more in line with the SP 500 and the rest of Corporate America at 30% - 33%, and lower than HD's.

In terms of intrinsic value estimates, our internal model values LOW at $65 per share, while Morningstar's DCF model values LOW at $47, right where it is trading currently. Our internal valuation model values HD at a 10% premium to Morningstar's so right now our own model is giving a higher premium to growth for LOW, and a bigger discount to intrinsic value to LOW, than for HD.

To conclude, there has suddenly been a surge of bearishness hit the housing and homebuilding and housing-related sectors the last few weeks. The DIY's like HD and LOW are different animals though. Both companies have returned an absolute ton of capital to shareholders, both exceeding their free-cash-flow generation, so at some point that has to stop and growth has to kick in. Management's can only cut expenses so much and repurchase so much stock to drive EPS growth, before they run out of room.

We have no position in LOW currently, and a reduced position in HD, but that may change before Tuesday. Id give a slight edge to LOW over HD at this point in terms of an upside pop, and given the intrinsic value estimate on LOW.

However, the smart way to play earnings this week might be to just wait and see what the results show, what guidance management's give, and how the stocks react.

Sometimes there is no compelling trade.

Disclosure: I am long HD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.