As the foundation of the American dream, home-ownership has spiraled to include not just buying homes but investing in home improvement ventures. Home renovations and repairs cost Americans more than $400 billion a year. However, the outbreak of Covid19 and the economic downturn has eroded gains made in the home remodeling activities. This turn of events has forced Lowe’s to launch new tech products to stay in touch with their clients.
With many Americans confined in their homes, Lowe’s Companies will invest more resources in refurbishing their novel loyalty program where it offers virtual home improvement services in the form of Do-it-Yourself (DIY) ventures. Online demand in the quarter increased sales by 80% with more millennial expenditure on home improvements expected in the future. This digital growth provides investors an opportunity to purchase LOW stock at an attractive valuation. Additionally, the stock is a beneficiary of low mortgage rates amidst the rise in home-ownership in the US.
Home Improvement Boom
Lowe’s Companies Inc. (NYSE: LOW) stock has risen by more than 100% since March 18, 2020 when it traded at $65.02. According to the Bank of America (BAC.PK), American millennials are spending the most in home improvement services during the Covid19 stay-at-home injunction. Approximately 70% of the 1,054 Americans polled by BAC, have indicated that their expenditures mostly include home renovation services during the pandemic. More spending on the same is expected in 2021.
The Dow Jones Home Improvement Retailers (DJUSHI) index currently at $507.66 has risen by more than 65% over the past 2 months alone. Another company set to benefit from the outdoor categories and the shift from quarantines is the Tractor Supply Company (TSCO). The stock has gained 94.21% over the last 3 months.
Sale of new homes in the US also increased by 0.6% from a bearish forecast of -21.9% in the month of May by 623,000 MoM. There was also high volatility in the sale of existing US homes in May-June that dropped by 5.1% to 3.91 million homes from a forecast of 4.12 million (-9.7% MoM and -26.6% YoY).
There is a positive correlation between the LOW stock and the DJUSHI index. The 52-week range of the index has risen from a low of $276.42 to a high of $526.88. A rise in the index will cause a subsequent increase in the price of LOW, Home Depot, Inc (HD) and Beacon Roofing Supply, Inc (BECN).
Loyalty Program’s functionality
Staying at home has helped people to realize that there are a lot of things they do not know how to do. The Do-it-Yourself program has been a great success story for Lowe’s Company. After its launch in 2015, the upgraded Pros website by Lowe’s has provided Pro customers with an online solution that offers stronger functionality in establishing requisition lists, access reports for purchase histories and process custom catalogs. Customers are able to track more than 500,000 items from their computers, choose and have them delivered. Market reception saw digital sales rise 80% with same store-sales increasing by 11.2% in Q1 2020.
The new Jobsight loyalty website powered by Streem helps pros to work remotely by providing a video assist program. In offering home improvement services, the pros can use the program to guide their customers around the worksite. They can sketch any points of interest and capture images such as product serial numbers while working. This remote function means that the pros can reach customers from every geographical location as long as they are subscribers. The company has also made the service free to use until October 31, 2020. This inclusion means more pros will join the program as well as increase store sales through Q4 2020.
The US Services Purchasing Manager’s Index (PMI) for June 2020 rose to 37.5% against a forecast of 36.9. While there is moderate volatility in the purchase of essential services such as transport and communication, there was a slight rise in acquisition of personal services including computer and IT-run processes. This PMI shows a positive step in IT-driven businesses such as home improvement programs.
Pro-Customer Business Strategy
In an interview, Fred Stokes, pro sales/ services Senior VP for Lowe’s admitted that professional services such as measuring windows and flooring had been cancelled due to the pandemic. The new Jobsight program will however, allow plumbers, electricians and other home-improvement contractors make virtual visits to their clients.
Sales from pros total to between 20-25% at Lowe’s in contrast with Home Depot, Inc.(HD) that accounts for 45% of the sales. The pro-customer business strategy at Home Depot ensures the company uses its omnichannel to leverage sales from its stores and e-commerce sites.
With a market capitalization of $267.98 billion and cash flow of $14.75B from operations, HD attracts both DIYers and contractors by offering a one-stop renovation shop for hardware tools, flooring and painting services etc. The company announced payment of cash dividend of $1.50 on June 18, 2020, causing the stock price to rise by 0.02% to $249.21.
Net earnings for LOW in Q1 2020 increased to $1.337 billion (at 6.80% increase in sales) from $1.046 billion (at +5.90% sales) in Q1 2019. Home Depot’s net earnings decreased its net earnings from $2.5 billion in Q1 2019 to $2.2 billion in Q1 2020. LOW’s competitive advantage is due to an efficient supply chain network.
Tax Credit and reduced Mortgage Rates
The FY 2020/2021, will be a year of many tax changes owing to the fact that the federal government is committed to helping businesses amidst the coronavirus pandemic. In the first quarter of 2020, private fixed residential investments added more than $857 billion to America’s GDP.
Tax credits targeting home improvement services would not only add value to homes but also act as a stimulus plan. If the credit will cover, say 25% of the improvement costs, a home-owner out to make $5,000 worth of the costs will get $1,250 as refundable tax credit.
A 3-year analysis shows that the rate of home ownership in America increased to 65.30% in Q1 2020 from 65.10% in Q4 2019.
Source: Trading Economics
The increase in home-ownership would naturally mean a subsequent rise in the mortgage rates. However, this has not been the case. Analysts expected that the increase in the May employment levels would cause a continual increase in the mortgage rates. While the rates increased albeit briefly, they have since fallen to record lows.
As at June 18, 2020; the fixed-rate conventional loan (for a 30-year term) was set at 3.25%. This rate is expected to persist until 2021, when the effect of Covid19 subsides. Further analysis shows that if the rates are increased to 3.5% there would still be a slight decrease in sale of existing-home from 4.92 million at seasonally adjusted annualized rates (SAAR) to 4.84 million SAAR (-1.63%).
Low mortgage rates will allow more Americans to own homes. This increase in home-ownership will increase the sale of home improvement services. The 3-year analysis shows that Low’s stock price increased when the mortgage rates were decreased and when the home-ownership rates were increased.
Risks and Valuation
Higher levels of unemployment in 2020 could reduce expenditures in home improvement. The unemployment rate dropped from 14% in April to 13.3% in May 2020 calming down fears of a recession. Unlike Home Depot Inc, that has a Long-Term Debt to Assets ratio at 0.66, LOW’s ratio stands at 0.51. The company’s free cash flow in Q1 2020 was +$4.12 billion with a liquidity base of more than $10 billion. The company’s investment in the professional business strategy provides an opportunity to increase the market share. The increase in same-store sales in Q1 2020 shows that LOW’s store network will be profitable until 2021.
Lowe’s Company increased its net earnings by 27.82% in Q1 2020as compared to Q1 2019 while Home Depot decreased net earnings in the same period by 12%. LOW’s e-commerce should ensure it attracts both DIYers and contractors by offering a one-stop renovation shop for hardware tools, flooring and painting services. An increase in digital sales by 80% shows that Lowe’s business strategy is working. Additionally, the increase in home ownership to 65.30% in Q1 2020 from 65.10% in Q4 2019 shows that home improvement service providers will have an increase in businesses in the fiscal year 2020/2021.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.