As the third-quarter earnings parade rolls on, results have largely been better than anticipated, and home-improvement retailer Lowe’s Companies, Inc. (LOW) was no exception.
Lowe’s stock was already up 18% year to date prior to its earnings report, and once it delivered higher-than-expected Q3 top- and bottom-line results amid a strengthening macroeconomic environment, investors added to those gains.
Home renovations coupled with bitter-cold temps that drove people into LOW’s stores for last-minute fixes were the catalysts foe Lowe’s stock in the third quarter, and company executives remain “cautiously optimistic” that the trend will continue, evidenced by their decision to raise full-year guidance. The U.S. housing-market recovery has been anything but stable, but sanguine employment and housing data have been contributing to the positive sentiment, including the most recent jump in building permits to multiyear highs.
However, with a price-to-earnings ratio of about 22 and a performance that has already showed up much of retail for the past year or so, could there be more gains ahead for Lowe’s stock?
Not to mention, monetary policymakers are tilting their hand toward a likely interest rate hike in mid-2015, which threatens to bring the momentum in the housing recovery to a screeching halt.
Nonetheless, there never seemed like a better time to make a bet on Lowe’s stock.
The Results
When it comes to quarterly performance, it doesn’t get much better than surpassing Wall Street estimates, and Lowe’s stock managed to do this by all accounts. Not only did third-quarter EPS of 59 cents beat the consensus by a penny, but it also represented a 25% increase versus the year-ago period. Revenue of $13.7 billion sailed past analyst views of $13.5 billion amid a same-store sales gain of 5.1% for which momentum over the past three months has been accelerating.
LOW management exerted some of that cautious optimism by lifting the high end of their full-year sales growth estimates to 5% from 4.5% and raising 2015 profit expectations by a nickel.
Lowe’s market-share gains have unfolded as chief Atlanta-based rival Home Depot (HD) has been suffering from a data breach, the total cost of which remains unclear. These two heavyweights have been battling particularly to win over the professional customer, where Lowe’s continues to invest in an attempt to capture the average $2,000 the average pro customer spends across each of its stores annually, according to the earnings call.
Lowe’s $61.4 billion market cap might never touch its larger rival Home Depot’s $130 billion. However, to quote Jennifer Aniston playing an ad exec in the 1990s flick Picture Perfect regarding Gulden’s Mustard, “We’re No. 2: And that ain’t bad!” That holds true for home-improvement retailers.
Incidentally, LOW suffered a data breach of its own, one that reportedly was the result of human error. It extended to tens of thousands of victims compared to the millions who were affected by Home Depot’s ongoing saga.
Interest Rates: Headwind or Opportunity?
A likely increase in interest rates might seem like a headwind that home-improvement retailers such as Lowe’s should brace for, especially considering that Lowe’s execs attributed their strong Q3 performance in part to the low-rate environment. However, as Oppenheimer analyst Brian Nagel suggested on CNBC, the Fed’s decision to raise interest rates would be indicative of a stronger economy, which in and of itself would benefit consumers.
He went on to note that historically, Home Depot and Lowe’s stock both outperformed the broader market during times of Fed tightening.
Shareholder Value
While Lowe’s stock already reflects its solid fundamentals, that doesn’t mean it doesn’t have further to go, especially in light of the priority the retailer places on shareholder value. Lowe’s in the third quarter alone repurchased $900 million worth of stock and distributed $229 million in dividends, for a 1.6% yield. There’s another $3.4 billion left on the current share-buyback authorization, and the company is targeting a payout ratio of 35% from about 30% over the trailing-12 months.
Bottom Line
If Lowe’s third-quarter performance is any indication, there are blue skies ahead for this home-improvement retailer, especially considering that share-buyback activity is set to accelerate. Lowe’s stock is not cheap, but it’s one that you should own in your portfolio if you don’t already because the stage is set for more gains ahead.
As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities.
