A valuation multiple helps investors compare companies with similar business models. Due to the high visibility of Lowe’s (LOW) earnings, we’ve chosen the forward PE (price-to-earnings) multiple for our analysis. A forward PE multiple is calculated by dividing a company’s current stock price from analysts’ earnings estimates for the next four quarters.
Forward PE multiple
Lowe’s lower-than-expected 4Q17 EPS (earnings per share) led to a fall in its stock and valuation multiple. As of March 2, 2018, Lowe’s was trading at a forward PE multiple of 15.3x compared to 16.4x before the announcement of its 4Q17 earnings. That same day, Lowe’s peers Home Depot (HD), Williams-Sonoma (WSM), and Bed Bath & Beyond (BBBY) were trading at forward PE multiples of 18.8x, 13.0x, and 7.8x, respectively.
From the above graph, we can see that Lowe’s has been trading above the peer median valuation multiple. Since it’s the second-largest home-improvement retailer in the world, Lowe’s enjoys higher margins, which along with strong SSSG (same-store sales growth) have caused the company to trade at a higher forward PE multiple than its peers.
To drive SSSG, Lowe’s has been focusing on enhancing its marketing management platform, transforming its supply chain, and providing compelling product experiences. All these initiatives are expected to drive the company’s expenses. If these initiatives fail to generate expected sales, the increased expenditure could put pressure on the company’s future earnings. For the next four quarters, analysts are expecting its EPS to rise 26.1%, which could have already been factored into the company’s current stock price. If the company posts earnings lower than analysts’ estimates, selling pressures could bring down the stock and the valuation multiple.
Next, we’ll look at analysts’ recommendations for LOW stock.