The Mooresville, S.C.-based home-improvement retailer has posted double-digit profit growth for the last five quarters. But consumers may contemplate a shift in spending to activities outside the home following recent news of two effective vaccines.
Lowe’s has more than 2,200 stores. It opened its first home-improvement store in 1946 and went public in 1961. In 2007, it opened its first stores outside the U.S., in Canada.
The company’s stock rose dramatically in the early 1990s, in step with the growing interest in DIY home-improvement trend. Indeed, HGTV launched in December 1994. That year, Lowe’s had net sales of $6.1 million. By 2019, that figure grew to $72.1 billion.
Lowe’s Stock Fundamental Analysis
Lowe’s Q3 earnings per share grew 40.4% to $1.98, though that missed Refinitiv estimates of $1.99, as revenue climbed 28% to $22.31 billion, with same-store sales shooting up 30.1%.
But continued costs related to Covid will put pressure on profits. In its Q3 earnings report Lowe’s said Covid-related costs to support hourly front-line workers totaled $245 million in Q3 and more than $1.1 billion year to date.
That came a day after rival Home Depot (HD) also beat earnings views and announced a $1 billion increase in annual compensation costs for front-line workers.
Lowe’s sees Q4 EPS of $1.10-$1.20, with the midpoint below consensus for $1.17, as same-store sales grow 15%-20%.
In addition, the fourth quarter is seasonally the weakest quarter for Lowe’s, CFRA Research analyst Kenneth Leon says. “As LOW invests in stores, PRO services, and e-commerce platform, the gross margin is likely to be flat in Jan-Q and early 2021,” he wrote in a research note.
Still, the company said at a Dec. 9 investor conference that its outlook for fiscal 2020 has improved. Lowe’s now sees total sales increasing approximately 22% after withdrawing guidance in May. Prior to the event, analysts had expected just a 4% increase in sales. Since then, they have adjusted their growth estimate to 22.6%.
Lowe’s also sees same-store sales rising 23% and EPS of $8.62-$8.72 for the year. Current consensus views call for $8.71.
According to the IBD Stock Checkup, Lowe’s boasts a three-year EPS growth rate of 21%. Its three-year sales growth rate is 6%.
But growth is expected to take a breather next year as it comes up again tougher comparisons. Wall Street sees EPS increasing around 5% to $9.12 on a revenue decline of about 3.5% to $85.4 billion.
Lowe’s Stock Technical Analysis
Shares have soared more than 30% in 2020. Lowe’s stock skyrocketed to a 52-week high of 180.67 in the months following the pandemic, according to MarketSmith chart analysis. Shares are now consolidating and have slipped below their 10-week moving average. It is too early to say if it’s forming a base.
Another opportunity came when Lowe’s 50-day line rose and crossed over its 200-day line. The “golden cross” on June 15 is considered a late buy signal.
Shares rose steadily since then and found support around their 50-day line in early September, setting up another buy range between 172.42 and 179.99 in early October.
But shares fell sharply on Nov. 9, following rumors that Lowe’s was in talks to buy HD Supply (HDS). And even though Lowe’s denied the rumors the following day, shares took another dive after it reported earnings on Nov. 18 and offered a cautious outlook.
The stock gapped up nearly 6% on Dec. 9, when Lowes updated its outlook for the year with rosier estimates. Shares have since found resistance right below the 50-day moving average.
Lowe’s relative strength line took a sharp turn lower on Nov. 6, but has been trending upwards in recent weeks. The RS line tracks a stock’s performance vs. the S&P 500 index. Lowe’s RS Rating is 63. The RS Rating tracks a stock’s performance compared to all stocks over the last 12 months, with emphasis on the past three months.
Lowe’s stock has an EPS Rating of 96. Lowe’s stock has a 96 out of a possible 99 Composite Rating. The Composite Rating lets investors measure a stock’s fundamental, technical and fund sponsorship quality compared to other publicly traded companies.
Lowe’s ranks No. 4 in IBD’s Retail/Wholesale-Buildings Products group. Floor & Decor Holdings (FND) ranks No. 1. Home Depot ranks No. 17.
Institutional ownership tells investors analysts at those firms have looked at Lowe’s and like what they see. Institutional firms account for 77% of the company’s ownership. The Vanguard Group is the largest shareholder with nearly 9% of shares outstanding. The second and third largest shareholders are BlackRock (BLK) with 7.6% andState Street Global Advisors with 4.6%.
Lowe’s Focus On Professional Builders
The retailer has been shifting its focus to contractors recently. Lowe’s CEO Marvin Ellison said at recent investor update day that the company’s “strategy will enhance customer engagement and grow market share by intensifying our focus on the Pro customer, expanding our online business, modernizing installation services, improving localization efforts and elevating our product assortment.”
Wolfe Research analysts covering Lowe’s stock note the company’s efforts include a refreshed loyalty program and a new nationwide tool rental program.
Sales per square foot at Lowe’s have long lagged that of key competitor Home Depot by about 30% over the past five years, Wolfe analysts say. That’s due to “a function of differences in store footprint, service levels, and exposure to the pro customer,” they wrote.
And the rivalry is about to get more fierce. Home Depot on Nov. 16 said it was reuniting with its former subsidiary HD Supply in an $8.7 billion purchase.
Will Vaccine Pump Brakes On Remodeling Trend?
Pfizer’s (PFE) vaccine has been approved and is in distribution. Moderna’s (MRNA) vaccine is in the review process and is expected to also get the nod shortly. News of the vaccines brought hope for looser social distancing.
Does this mean shoppers curb spending on their homes in favor of entertainment and travel?
Some of them probably will. But the reality is that mass vaccination can take months. So analysts are confident that other market trends, like low borrowing rates, will sustain growth in home improvement.
Lowe’s isn’t waiting for foot traffic to pick up to make changes to its store layout to improve operating margins. The plan is to make it easier and faster for shoppers, especially pros, to find what they need based on the project they’re working on.
That might mean stocking roofing tiles and roofing nails in the same aisle and not on opposite ends of the store.
“The program is set to take shape throughout Q3 and Q4,” Wolfe Research analysts wrote. Analysts say Lowe’s is targeting professionals because they spend about five times as much as the typical DIY customer each year.
Is Lowe’s Stock A Buy Now?
The booming housing market gave Lowe’s stock and earnings a robust tailwind this year but growth is due to slow sharply soon and costs are rising.
Shares have come well off highs, and the relative strength line nose-dived starting in October, indicating severe underperformance vs. the broader market, which has notched record highs recently.
Bottom line: Lowe’s stock is not a buy right now. Shares are not in a buy zone. If it could rise above its 50-day line, it could start to form a cup base, but for now no discernible pattern has formed. Profit will be under pressure as Lowe’s continues to spend heavily on Covid safety measures.
Investors can check out IBD Stock Lists and other IBD content to find dozens of the best stocks to buy or watch.
YOU MAY ALSO LIKE:
Follow Adelia Cellini Linecker on Twitter @IBD_Adelia.