A valuation multiple helps investors compare companies with similar business models. We’ve opted for the forward PE multiple due to the high visibility of Lowe’s Companies’ (LOW) earnings. A forward PE multiple is calculated by dividing a company’s stock price by analysts’ earnings estimates for the next four quarters.
Lowe’s forward PE multiple
Although Lowe’s first-quarter earnings were lower than analysts’ expectations, the stock rose due to reports that Bill Ackman’s Pershing Square Capital is acquiring a $1 billion stake in the company. The rise in the stock raised the company’s valuation multiple. As of May 23, Lowe’s was trading at 16.7x compared to 15.4x on May 22.
From the above graph, you can see that Lowe’s is trading above its peers’ median valuation multiple. On May 23, Home Depot (HD), Williams-Sonoma (WSM), and Bed Bath & Beyond (BBBY) were trading at 19.3x, 11.6x, and 8.1x, respectively.
To drive sales, Lowe’s is focusing on product innovation, enhancement of both online and offline customer experience, the transformation of its supply chain to serve its customers better, and the facilitation of its repairs and maintenance services. These initiatives are expected to increase the company’s expenditures. If these initiatives fail to generate expected sales, the increased expenses could put pressure on its future earnings.
For the next four quarters, analysts are expecting Lowe’s EPS to rise 23.1%, which could have already been incorporated into the price of the stock. If the company fails to post earnings in line with analysts’ expectations, selling pressure could bring down the stock and the valuation multiple.
Next, let’s take a look at analysts’ recommendations.