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Is Lowe’s a Buy after Its Impressive Q1 Performance?

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On Thursday, Lowe’s Companies (NYSE:LOW) reported its first-quarter earnings. For the quarter, the company beat analysts’ revenue expectations by 7.4% and EPS expectations by 34.1%. The SSSG was 11.2% higher than analysts’ expectation of 3.3%. Meanwhile, COVID-19 related sales contributed to 8.0% of the company’s SSSG. Lowe’s online sales grew 80% YoY (year-over-year). So, the company’s stock rose due to its impressive first-quarter performance. As of May 21, the company was trading at $120.64, which represents a rise of 3.2% since its first-quarter earnings. Currently, Lowe’s trades at a discount of 4.8% from its 52-week high of $126.73. So, should you buy the stock?

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Analysts’ revenue expectations for Lowe’s Companies

With uncertainty surrounding the impact of COVID-19, Lowe’s management withdrew its guidance for 2020. Meanwhile, analysts expect the company to report revenue of $75.34 billion in 2020, which represents a growth of 4.4% from $72.15 billion in 2019. The company’s management continues to focus on executing its strategies. Lowe’s has been targeting professional customers, improving customers’ experience through implementing technological advancements, introducing new brands, and transforming its supply chain to drive its sales.

Lowe’s continues to focus on providing job lot quantities, using department supervisors, and improving its in-store experience to attract professional customers. The company has also built 7,000 merchandising service teams to improve its day-to-day functioning and deliver an excellent shopping experience for its customers. Last year, the company’s management announced that it would invest $1.7 billion over the next five years to strengthen its supply chain. Meanwhile, the company opened three bulk distribution facilities and four new cross-dock terminals in 2019. All of these initiatives could drive the company’s sales.

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Analysts’ EPS expectation for 2020

For 2020, analysts expect Lowe’s to report an EPS of $6.45—a growth of 12.1% from $5.75 in 2019. The revenue growth, improved EBIT margin, and a lower number of shares outstanding could drive the company’s EPS. Meanwhile, increased interest expenses and a higher effective tax rate could offset some of the EPS growth. Analysts expect the company’s EBIT margin to improve from 9.1% to 9.6%. A higher gross margin and lower D&A (depreciation and amortization) expenses could improve Lowe’s EBIT margin. However, increased operating expenses could offset some of the improvements. The company’s operating expenses might increase due to initiatives to support employees amid the outbreak and precautionary measures.

In the first quarter of 2020, Lowe’s management repurchased 9.6 million shares for approximately $947 million. However, the company announced that it won’t repurchase more shares this year. The company’s interest expenses could rise by $112.4 million to $803.4 million. Meanwhile, the effective tax rate could rise from 23.9% to 24.7%.

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Lowe’s valuation multiple and dividend yield

As of May 21, Lowe’s was trading at 18.7x analysts’ 2020 EPS expectation of $6.45 and at 17.0x analysts’ 2021 EPS expectation of $7.11. Analysts’ expectations represent a YoY growth of 12.1% in 2020 and 10.3% in 2021.

On March 20, Lowe’s management reported quarterly dividends of $0.55 per share, which represents an annualized payout rate of $2.20 per share. Also, the company’s dividend yield was 1.82% with its stock price trading at $120.64. On the same day, Home Depot (NYSE:HD), Williams-Sonoma (NYSE:WSM), and Bed Bath & Beyond’s (NASDAQ:BBBY) dividend yields were 2.5%, 2.9%, and 10.0%, respectively.

Analysts’ recommendations

Since Lowe’s reported its first-quarter earnings, Instinet, UBS, Wedbush, Credit Suisse, Stifel, RBC, Telsey Advisory Group, KeyBanc, Bank of America, Piper Sandler, and SunTrust Robinson have all raised their target prices. Meanwhile, Stifel upgraded the stock to a “buy” from a “hold” rating. Overall, 30 analysts follow Lowe’s. Among the analysts, 80% recommend a “buy,” while 20% recommend a “hold.” None of the analysts recommend a “sell.” As of May 21, analysts’ 12-month target price was $135.28, which represents a 12-month return potential of 12.1%.

My take on Lowe’s

Lowe’s has underperformed Home Depot for some time. However, under Marvin R. Ellison’s leadership, the company has been making significant strides. The investment to strengthen its supply chain, implementation of technological advancements, growth in online sales, and initiatives to attract professional customers strengthened my bullish view on the stock. For the company that’s expected to report double-digit EPS growth this year and next year, it’s trading at a reasonably attractive valuation multiple. So, I think that investors should accumulate the stock for better returns in the long run.

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