Lowe’s Valuation Multiple Compared to Its Peers
Of the various available valuation multiples, we’re using the PE (price-to-earnings) ratio due to high visibility in Lowe’s (LOW) 1Q17 earnings. The forward PE multiple is calculated by dividing the current stock price by the earnings estimate for the next four quarters.
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Lowe’s PE multiple
As of May 15, 2017, Lowe’s was trading at 17.7x—compared to 16.4x before the announcement of its 4Q16 earnings. Better-than-expected 4Q16 earnings, a rise in the housing price index, and an increase in home sales appear to have increased investors’ confidence. Increased confidence led to a rise in Lowe’s stock price and its PE multiple.
In the above graph, you can see that Lowe’s is trading at a higher forward PE multiple than its peers’ median multiple. As the second-largest home retailer in the US, Lowe’s enjoys greater margins and higher growth. As a result, it’s able to trade at a higher multiple than its peers.
For the next four quarters, analysts expect Lowe’s to post EPS of $4.65—growth of 16.8% from $3.98 in 2016. The EPS growth might have been factored into Lowe’s current stock price. If the company posts earnings that are lower than analysts’ estimates, selling pressure could lower the company’s stock price and its PE multiple.
You can mitigate these company-specific risks by investing in the Consumer Discretionary Select Sector SPDR Fund (XLY). XLY has invested 7.5% of its holding in home improvement retailers.
Next, we’ll look at analysts’ recommendations.