The U.S. housing market continues to improve, and it is not only leading to new home construction, but rising home prices are also enticing homeowners to once again start making repairs and upgrades to their current properties.
One company that has been benefiting from this growth, as well as the improvements in the nation’s job market, is Lowe’s (LOW), a home improvement retailer. This benefit will become obvious when Lowe’s reports its second quarter results before the market opens on August 21.
The job market improvement is certainly boosting Lowe’s because more families are able to make repairs to their homes that they put off during the economic crisis. Therefore expect strong numbers for Lowe’s when it reports its second quarter results.
Bullish Earnings Expected
Lowe’s closed at $43.67 on Monday which is a drop from last week’s performance of better than $46.00 – this means a cheaper options trade and more profits.
There is also a sound basis for the bullish expected earnings, according to the analysts, of $0.79 per share on revenue of $15.04 billion, an increase in earnings per share of 16% on a year over year basis. As with Home Depot (HD), shares have performed very well up until this point. Shareholders are up 23% this year alone.
Valuation Supports Lowe’s Options Call
While Lowe’s is not the only company that stands to benefit from the ongoing rebound in both the prices and sales of new and existing homes, it is definitely a strong choice due to its still-attractive valuation.
The general case for home-improvement stores includes the rising number of home buyers and sellers who tend to engage in renovation and home improvement projects, in addition to purchasers of new homes, who also tend to add home décor, window treatments, and furnishings.
Lowe’s in particular has been undergoing a turnaround, which means that its stock is still cheaper than that of its larger rival, Home Depot.
The shares now sell at about at 16 times expected next year earnings and 3.4 times book value, versus 18 times future earnings and 6.8 times book value for Home Depot.
Further Bullish Activity
There is definitely plenty of bullish support for Lowe’s — hedge funds Horseman Capital Management and Edgar Wachenheim’s Greenhaven Associates hold 668,800 shares and 12 million LOW shares respectively. And just this month, three analysts — Telsey Advisory Group, Canaccord Genuity and Cleveland Research — have increased their price target or upgraded the stock.
Even though Lowe’s has not shown much of an improvement in its business with both revenue and profits about flat in its most recent quarterly report compared to the same period in the previous fiscal year, Wall Street analysts do expect growth to pick up, and the forward earnings multiple of 18 represents a small discount to its larger peer Home Depot.
Even more encouraging is Lowe’s promise. The company’s stated goal is at the front and center of a transformation that started in 2011 — to create a more differentiated brand experience. It has focused on improving its core business, which should lead to growing sales and improved profitability.
Other factors that favor this options trade are:-
- The pullback of Lowe’s stock prices, which now makes for an even more attractive entry play, and which should provide a profit of 63%.
- An upward channel is present (see first chart) – the January call allows for any unexpected circumstances.
- There is plenty of open interest on this particular position.
Therefore, based on the facts above the following options trade is recommended…
Options Trade: Buy the LOW Jan 2014 45.000 call (LOW140118C00045000) at or under $2.15, good for the day. Place a protective stop limit at $1.00 and a pre-determined sell at $3.50.
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