Due to the high visibility in Lowe’s Companies (LOW) earnings, we have considered the forward PE (price-to-earnings) multiple for our analysis. The forward PE multiple is calculated by dividing the company’s stock price from the analysts’ earnings estimate for the next four quarters.
Lowe’s forward PE multiple
The lower-than-expected 1Q17 earnings and the entry of Amazon.com (AMZN) into the appliance sector have made investors’ skeptical of Lowe’s future earnings. The entry of Amazon is expected to curb the pricing power of retailers and lower their margins.
On August 17, 2017, Lowe’s was trading at a forward PE multiple of 14.9x, compared with 17.0x before its 1Q17 earnings announcement.
From the above graph, you can see that Lowe’s has been trading above its peers’ median value. As the second-largest retailer in the world, Lowe’s enjoys higher margins and greater growth prospects.
To expand its multifamily MRO (maintenance, repair, and operations) business, Lowe’s has acquired Central Wholesalers and Maintenance Supply Headquarters. The company also updated its lowes.com and LowesForPros.com to include advanced features to drive SSSG (same-store sales growth). All these initiatives have increased Lowe’s expenses. If the initiatives fail to generate expected sales, the increased expenditure could put pressure on its margins and lower its earnings.
For the next four quarters, analysts are expecting Lowe’s EPS (earnings per share) to rise 14.7%, which could have been factored into its current stock price. If Lowe’s posts earnings that are lower than the analysts’ estimate, the selling pressure could bring the company’s stock price and valuation multiple down.
In the next and final part, we’ll assess the analysts’ recommendations.