Is Lowe’s stock a buy?

In some ways, 2020 has been a year divided between big and small, with the COVID-19 pandemic primarily determining which side of the divide businesses fall into. But in other ways, it was a distortion of what happens in a normal year, and we can expect 2021 to be a lot different.

Many companies have experienced their best growth ever, and it will likely come back to earth, while others have suffered and are getting back on track.

Lowe’s (NYSE: LOW) had a fantastic year, beating rival and industry leader Home Depot (NYSE: HD) in sales growth. But what will happen next year and should you buy today?

Image source: Getty Images.

Reach first place

Just over a year ago, in Q4 2019, Lowe’s struggled with an outdated digital agenda and digital growth of just 3%. Comps were only 2.5%.

But the home improvement company was investing in technology to fuel higher growth as well as building new infrastructure to improve its supply chain.

These changes have helped the company achieve high sales and digital sales throughout the pandemic.

Metric (YoY) Q1 2020 Q2 2020 Q3 2020 Q4 2020
Growth comps in the United States 12.3% 35% 30% 29%
Digital growth in the United States 80% 135% 106% 121%

Data source: Lowe’s quarterly reports. YoY = year after year.

Keeping the momentum going this year

Lowe’s sees a $ 900 billion home improvement market, of which it owns about 10%, and is working on several new initiatives to keep the momentum going into 2021 and beyond.

The most urgent thing is to expand its omnichannel capabilities. This is why it has thrived throughout the pandemic, and if it has any chance of succeeding in its aftermath, adding new features is crucial. Some of the features he is developing are same day service and better in-store order processing.

The company is adding online-only products as well as a wider product assortment in general, and is focusing on productivity and improving its supply chain network to increase profitability. (The operating margin increased in the fourth quarter from 1.5% to 7.5% and for the full year from 2% to 10.8%.)

Lowe’s strengthens its professional segment with tool rentals, new professional quality brands and an expanded pro membership program. The pro segment is one of its competitive advantages, and strengthening this category is a key to driving sales.

Finally, Lowe’s is expanding its private labels, which has been a very successful strategy for retailers. Target (NYSE: TGT). Private labels can increase profitability and the company can have greater control over the supply chain. It is an evolution to watch.

The challenges along the way

The main challenge for Lowe’s in the coming year is a potential drop in home improvement product sales, which increased as people stayed in their homes and worked on home improvement projects. This should decrease as economies reopen and people start spending in areas that were limited last year, like travel.

The company has modeled three scenarios for 2021: a robust market with a 2% drop in sales; a moderate market with a drop of 5%; and a weak market with a decline of 7%. Whatever the outcome, Lowe’s expects some pressure over the next year. However, to put this in perspective, the company has already demonstrated that it is on track to gain market share and will continue to leverage its investments in technology and the supply chain.

Lowe’s is a dividend king, and he has increased his dividend over the past 57 years. Its dividend yields 1.15%. Lowe’s stock has gained 174% over the past five years.

The company is taking steps to increase its market share and support its growth, and those steps are producing results. I recommend Lowe’s as a value pick to add stability to your portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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