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Lowe’s Valuation Multiple Falls after 3Q17 Earnings

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Valuation multiple

We’ve opted for the forward PE (price-to-earnings) multiple due to the high visibility in Lowe’s Companies’ (LOW) earnings. The forward PE multiple is calculated by dividing the company’s stock price from analysts’ earnings estimate for the next four quarters.

Lowe’s forward PE multiple

Despite posting strong 3Q17 earnings, Lowe’s management didn’t raise its 2017 guidance, which appears to have made investors skeptical about the company’s future earnings, leading to a fall in the company’s stock price and valuation multiple. As of November 21, Lowe’s was trading at a forward PE multiple of 16.0x, compared to 16.2x before the announcement of 3Q17 earnings.

From the above graph, we can see that Lowe’s is trading above its peers’ median. The world’s second-largest home improvement retailer, Lowe’s enjoys higher margins. Also, higher SSSG (same-store sales growth) has allowed the company to trade at a higher forward PE multiple than its peers’ median. On the same day, peers Home Depot (HD), Williams-Sonoma (WSM), and Bed Bath & Beyond (BBBY) were trading at 21.1x, 12.3x, and 7.2x, respectively.

Growth prospects

To drive SSSG, Lowe’s has been focusing on increasing its breadth of assortment, enhancing customer experience through the implementation of technological advancements, and marketing and promotional initiatives. These initiatives are expected to increase Lowe’s expenditure. If these initiatives fail to generate expected sales, the increased expenses could pressure the company’s earnings.

For the next four quarters, analysts expect Lowe’s to post EPS growth of 10.6%, which could have been baked into the company’s current stock price. If the company fails to post earnings in line with analysts’ estimates, selling pressure could bring the company’s stock price and valuation multiple down.

Next, we’ll look at analysts’ recommendations for Lowe’s.

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