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RH, LOW Stocks: EPS Growth Could Appease Concerns

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  • RH has raised its fiscal 2019 earnings guidance.
  • Near-term sales and margin headwinds haven’t hurt investor sentiment. Analysts expect Lowe’s and RH’s earnings to grow robustly.

RH (RH) and Lowe’s (LOW) stocks have grown healthily this year. RH stock was up 43.1% year-to-date as of yesterday, exceeding broader markets by a wide margin—the S&P 500 had risen 19.9%. Meanwhile, Lowe’s stock has risen 21.9% this year.

Sales and margin headwinds didn’t limit either RH and Lowe’s this month, with their stocks rising about 23% and 20%, respectively. We believe things could improve further from here, especially on the earnings front. Analysts expect Lowe’s bottom line to grow significantly this year, and to sustain that momentum in fiscal 2020.

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As for RH, the company expects its third-quarter sales growth to be softer than in the first half of the year, and for its adjusted gross margins to narrow YoY (year-over-year). Despite near-term challenges, RH raised its fiscal 2019 sales and EPS outlook during the second quarter. And yesterday, it raised its fiscal 2019 EPS guidance further, to $10.78–$11.01 from $10.53–$10.76. RH stated that its debt reduction could boost its EPS by $0.25 in fiscal 2019 and $0.75 in fiscal 2020.

RH stock’s outlook

RH’s new fiscal 2019 earnings guidance implies 26%–29% YoY growth, and it’s higher than Wall Street’s expectation of $10.71. We expect RH to sustain its sales and earnings momentum in future quarters and report strong growth. The stock has rallied 43% this year. Although a small pullback could provide a buying opportunity, even RH stock’s current valuation looks attractive and is well within reach.

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RH stock trades at 15.7 times its fiscal 2019 EPS estimate of $10.90 and 14.3 times its fiscal 2020 EPS estimate of $12.02. Both multiples look attractive given the high-single-digit sales and double-digit earnings growth expected in those periods. Moreover, RH stock trades at 14.8x its forward enterprise value-to-EBITDA multiple, well below peers’ average of 17.9x.

LOW stock’s outlook

We believe the anticipated acceleration in Lowe’s second-half EPS growth could drive its stock further. In this year’s first half, lower lumber prices and margin pressure impacted Lowe’s. Its EPS growth plunged sequentially, leading management to reduce its fiscal 2019 EPS outlook.

However, analysts expect Lowe’s adjusted EPS to grow strongly in this year’s second half, and to sustain that growth in fiscal 2020. They expect Lowe’s EPS to grow about 30% in the third quarter, 17% YoY in the fourth quarter, and 18% YoY in fiscal 2020.

Lowe’s stock trades at 18.1 times and 16.9 times its fiscal 2019 and fiscal 2020 EPS estimates, respectively. Both figures look reasonable, given the company’s projected growth of 11.0% and 18% in those periods. Furthermore, LOW stock trades at 17.8x its forward enterprise value-to-EBITDA multiple, significantly below peers’ average of 21.6x.

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