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Lowe’s Hits a New 52-Week High: What’s Next?

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Although the COVID-19 outbreak has dragged many stocks down, Lowe’s Companies has continued to rise. Lowe's hit a new 52-week high of $144.94 on July 16. This year, the stock has returned 20.7 percent. Lowe's stock has easily outperformed equity markets and its peers. Year-to-date, the S&P 500 has been flat, while Home Depot has returned 19.2 percent.

Amid the COVID-19 pandemic, investors hope that people will divert their discretionary spending toward the home improvement sector as they spend more time in their homes. Investors’ optimism and Lowe’s strong second-quarter earnings appear to have boosted the company’s stock price.

Lowe’s stock has rallied over 140 percent from its March lows. What is next ater such a massive rally? Under the leadership of Marvin Ellison, Lowe's has taken significant measures to drive its same-store sales growth and improve its profitability. As a result, the rally may continue. 

Analysts’ expectations for Lowe’s

Analysts expect Lowe’s to report revenue of $7.68 billion this year, which represents YoY (year-over-year) growth of 6.4 percent. Next year, they expect the company’s revenue to rise 2.0 percent to $7.83 billion. The company has been investing in technological advancements and transforming its supply chain to improve customers’ experience. Last year, Lowe's adopted a series of initiatives to attract professional customers, which included maintaining job lot quantities at its stores, providing flexible delivery services, and improving its in-store experience.

In 2018, Lowe’s announced that it would be investing $1.7 billion over the next five years to strengthen its supply chain. As part of the initiative, the company opened three bulk distribution facilities in 2019. The company has also migrated its online business to Google Cloud, which could improve the website’s stability and ability to handle higher traffic. In the first quarter, the company’s online sales grew 80 percent YoY.

What are analysts’ EPS expectations for Lowe's?

Analysts expect Lowe’s to report strong EPS growth over the next two quarters. They expect the company’s EPS to rise 17.7 percent to $6.77 in 2020 and by 8.3 percent to $7.33 in 2021. Along with the sales growth, an improved EBIT margin and lower share count could drive the company’s EPS. Lowe's positive SSSG could also drive its EBIT.

In the first quarter, Lowe's repurchased 9.6 million shares for $947 million. However, the company announced that it will halt its share repurchase program for this year to conserve cash. An increase in interest expenses due to higher debt levels could offset some of the company’s EPS expansion. In the first quarter, Lowe’s raised additional capital amid the COVID-19 pandemic by issuing senior notes worth $4 billion.

Lowe's dividend yield and valuation

On May 28, Lowe’s board announced quarterly dividends of $0.55 per share to be paid on Aug. 5 to shareholders as of July 22. On July 17, the company’s dividend yield stood at 1.56 percent. On the same day, Home Depot, Williams-Sonoma, and Bed Bath & Beyond had dividend yields of 2.3 percent, 2.29 percent, and 7.38 percent, respectively.

The recent surge in Lowe’s stock price has raised its valuation multiple. As of July 17, the company’s forward PE ratio was 20.6x. Lowe's average forward PE ratio over the next three years is 16.9x. Home Depot and Williams-Sonoma have forward PE ratios of 24.7x and 18.0x, respectively.

Analysts’ recommendations for Lowe’s

Since the beginning of June, Jefferies, Stifel, Instinet, Bank of America, and Piper Sandler have all raised their target price. Among the price hikes, Piper Sandler has given the highest target price of $170, while Instinet’s target price was lowest at $146. As of July 17, analysts’ consensus target price was $144.56, which is close to the stock’s current value.

Wall Street is bullish on Lowe’s. Among the 30 analysts covering the stock, 83.3 percent suggest a buy, while 16.7 percent suggest a hold. None of the analysts suggest a sell.

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