Lowe’s Companies, Inc. (NYSE:LOW) shares are up more than 21.36% this year and recently decreased -3.57% or -$3.08 to settle at $83.23. Floor & Decor Holdings, Inc. (NYSE:FND), on the other hand, is up 37.38% year to date as of 12/05/2017. It currently trades at $42.57 and has returned 12.93% during the past week.
Lowe’s Companies, Inc. (NYSE:LOW) and Floor & Decor Holdings, Inc. (NYSE:FND) are the two most active stocks in the Home Improvement Stores industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect LOW to grow earnings at a 13.43% annual rate over the next 5 years. Comparatively, FND is expected to grow at a 27.20% annual rate. All else equal, FND’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. Lowe’s Companies, Inc. (LOW) has an EBITDA margin of 10.45%. This suggests that LOW underlying business is more profitable LOW’s ROI is 16.90% while FND has a ROI of 10.60%. The interpretation is that LOW’s business generates a higher return on investment than FND’s.
The value of a stock is simply the present value of its future free cash flows. LOW’s free cash flow (“FCF”) per share for the trailing twelve months was -0.43. Comparatively, FND’s free cash flow per share was -0.07. On a percent-of-sales basis, LOW’s free cash flow was -0.55% while FND converted -0.63% of its revenues into cash flow. This means that, for a given level of sales, LOW is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. LOW has a current ratio of 1.00 compared to 1.30 for FND. This means that FND can more easily cover its most immediate liabilities over the next twelve months. LOW’s debt-to-equity ratio is 2.91 versus a D/E of 0.48 for FND. LOW is therefore the more solvent of the two companies, and has lower financial risk.
LOW trades at a forward P/E of 16.73, a P/B of 13.12, and a P/S of 1.04, compared to a forward P/E of 52.11, a P/B of 10.71, and a P/S of 3.26 for FND. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. LOW is currently priced at a -4.9% to its one-year price target of 87.52. Comparatively, FND is -4.49% relative to its price target of 44.57. This suggests that LOW is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.30 for LOW and 2.30 for FND, which implies that analysts are equally bullish on their outlook for the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. LOW has a short ratio of 1.13 compared to a short interest of 2.13 for FND. This implies that the market is currently less bearish on the outlook for LOW.
Lowe’s Companies, Inc. (NYSE:LOW) beats Floor & Decor Holdings, Inc. (NYSE:FND) on a total of 7 of the 14 factors compared between the two stocks. LOW is more profitable, generates a higher return on investment and has a higher cash conversion rate. In terms of valuation, LOW is the cheaper of the two stocks on an earnings and sales basis, LOW is more undervalued relative to its price target. Finally, LOW has better sentiment signals based on short interest.