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Why Lowe’s Companies, Inc. (LOW) Stock Isn’t Slowing Down Soon

Lowe’s Companies, Inc. (NYSE:LOW) reports its fiscal Q1 earnings on Wednesday morning and the report seems likely to be good news for LOW stock.

Lowe's Companies, Inc Low stock

Expectations for Lowe’s earnings are admittedly high. Analysts expect nearly 12% revenue growth and a 22% jump in earnings-per-share.

The company’s earnings were strong in Q1 FY16 — revenue up 8%, EPS up 40% — creating a difficult comparison. And while Q4 numbers were solid — leading LOW stock to rise almost 10% — the company’s performance historically has been somewhat inconsistent.

Indeed, Lowe’s earnings disappointed in both Q2 and Q3 last year.

But a closer look shows that expectations aren’t that high, particularly when considering last year’s acquisition of Canadian retailer Rona. The macro environment looks beneficial at the moment, and the weather was likely in LOW’s favor.

More importantly for Lowe’s stock, it does look like it has made major improvements in its business of late. The gap between LOW’s and rival Home Depot Inc (NYSE:HD) is narrowing. Lowe’s margins are improving steadily. And unlike pretty much every other retailer in the U.S., the company seems reasonably protected from, Inc. (NASDAQ:AMZN), at least for now.

With LOW stock still trading at reasonable earnings multiples, more upside seems likely. And Q1 earnings could be a catalyst for that upside.

Lowe’s Earnings Expectations Look Within Reach

Again, estimates for earnings do look somewhat high: 12% year-over-year growth in revenue seems like a tough figure, even in a reasonably strong environment for construction and renovation.

But Lowe’s will have some help. Last year’s acquisition of Rona should add 6 points or so of growth — half of Street estimates. LOW has added another 40 or so stores since last year, providing another 2-3 points of benefit. In other words, analysts seem to be projecting roughly 3-4% same-store sales growth.

That’s right in line with full-year guidance, but would imply a deceleration from the 5.1% growth in Q4. And while adjusted EPS growth of 22% seems aggressive, LOW’s guidance looks reasonably conservative.

Management said on the Q4 conference call that Lowe’s earnings growth would come from operating leverage, not gross margin. That leaves some room for Lowe’s to again beat expectations on the bottom line in Q1.

Meanwhile, U.S. government retail sales figures for April showed strength in building products. That bodes well for both LOW and HD. And with Lowe’s stock pulling back modestly into the report, the possibility of a “beat and fall” quarter, in which ‘unofficial’ expectations lead the stock down, looks diminished.

Expecting another 9%+ gain, as seen after Q4, probably is too optimistic. But there’s room for earnings to again at least please the market and drive more upside in LOW stock.

LOW Stock Looks Promising Longer-Term

I liked Lowe’s stock coming out of Q4, and see no reason to change that opinion heading into earnings. The question for the stock is whether the company truly is going to be able to keep up with Home Depot going forward. After the Q4 improvement, Q1 should help answer that question, making it a big quarter for Lowe’s.

But at $84, LOW probably doesn’t have to be perfect to drive more upside in the stock. Lowe’s stock trades at barely 18x FY18 EPS guidance — hardly a multiple that assumes exponential growth next year and beyond. A continuation of past trends, and underperformance relative to Home Depot in terms of sales growth, probably still supports that multiple. And a 1.7% dividend yield, plus a 54-year history of raising that dividend, provides some cushion in that scenario.

But if it can start keeping pace with HD, LOW stock has upside. And the long performance gap between the two stocks should narrow, if not reverse.

It’s not quite a “heads I win, tails I don’t lose” situation. There is macro risk in Lowe’s stock, but at the moment, new construction and renovation trends both look favorable. And there’s a chance that some of the long-frustrating underperformance at LOW could return.

But there’s also benefits to come from margin improvement and the Rona acquisition (which will be lapped in Q2). Two recent acquisitions give Lowe’s a stronger foothold in multifamily and with ‘pro’ customers. The latter group is a profitable and desirable demographic, one targeted not only by Home Depot, but by smaller Tile Shop Hldgs, Inc. (NASDAQ:TTS). That means those small acquisitions could turn into larger contributors.

The broad point here is that there remain reasons for optimism, even with LOW stock near an all-time high. Yet the stock isn’t pricing in that much in the way of growth. Expectations both for Q1 and longer-term still seem reasonable. And that implies upside for LOW stock at some point.

As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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