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Lowe's Will Never Stop Improving and Remains a Strong Buy

Tickers in this article: HD LOW

NEW YORK ( TheStreet) – "Never stop improving" is Lowe's motto and management understands what it must do to satisfy Wall Street's appetite for profits. The company has begun to lay the foundation.

The stock closed Monday at $50.45, up 1.8% on the year to date, besting the 0.26% decline posted by the home improvement sector. Rival Home Depot has posted gains of just 2.7% in 2014 . That's part of Lowe's problem.

You see, it doesn't matter how well Lowe's performs . The company will always be measured by how well Home Depot does. This is a pattern frustrated Lowe's shareholders know all too well -- analysts can't stop pulling out the measuring tape. Fairly or unfairly, that's Lowe's reality.

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What I think is more important consider is the extent to which the U.S. housing market will continue to rebound. Unless investors believe another collapse is imminent there should be plenty of business for both Lowe's and Home Depot to prosper. This is not, however, how Wall Street is evaluation Lowe's .

With the stock trading at around $50 per share, Lowe's is valued at a price-to-sales ratio of 0.9. Consider, this is 50 basis points below the industry average P/S of 1.44. And 1.44 is exactly where Home Depot is priced at.

In my view, management's recent guidance, which includes 4% increase in same-store sales and a 65-basis point jump in operating margin, tells another story. Management expects to make the sort of growth and efficiency improvements that makes Lowe's a solid investment. On the basis of long-term revenue and margins expansion, these shares should be worth $55 to $60 in the next 12 to 18 months.

What's more, based on 2015 earnings estimates of $3.14, Lowe's price-to-earnings ratio drops to around 15, or 4 points below the industry average. Home Depot, on the other hand , commands a forward P/E of 16.34, roughly a full point higher than Lowe's. This is even though Lowe's is growing earnings at a faster rate (15.6% vs. 12.5%).This doesn't make sense.

The other thing is, Lowe's management projects to grow full-year revenue by 5% versus Home Depot's projected growth 4.7%. And when you factor Lowe's projected year-over-year earnings growth of 21%, compared to Home Depot's 17%, Wall Street will have no choice but to adjust for this discount.

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So while I do love Home Depot's business and its prospects, there is still plenty of value in Lowe's. The company is in the midst of a significant store expansion. Aside from opening close to 80 new locations in 2013, Lowe's is rapidly expanding is footprint on the west coast. Management's $205 million deal last year for Orchard Supply gives Lowe's access to new urban areas in California.