Home improvement retailer Lowe’s Companies, Inc. (NYSE:LOW) is set to release second-quarter earnings before the bell on Wednesday. While I am not particularly fond of LOW stock heading into the report, I do think that any post-earnings sell-off would offer a compelling “buy the dip” opportunity.
With Lowe’s stock, then, sell now, buy later is my strategy.
Investors are buying up LOW stock immediately ahead of the report, but this pre-earnings rally comes after a pretty steep sell-off.
Lowe’s, which currently trades around $74 and change, traded north of $86 just 3 months ago.
That was before LOW reported pretty ugly first-quarter numbers that missed expectations across the board. Revenues came in light of expectations. So did earnings. Comparable sales rose only 1.9%, a sharp fall off from the 5.1% gain in the prior quarter. Gross margins fell, and operating margins fell even more.
Is Home Depot Better Than Lowe’s?
Those low growth numbers were especially troubling because Home Depot Inc (NYSE:HD) had a big first quarter. Revenue and earnings both topped expectations by a sizable amount. Comparable sales rose 5.5%, roughly in-line with the 5.8% gain reported in the previous quarter. Gross margins were essentially flat, and operating margins expanded due to operating expense leverage.
Clearly, Home Depot is outperforming Lowe’s. And this is nothing new. Over the past three years, Home Depot’s comps have trended in the 5.5% range. Lowe’s comps in that time-frame have trended in the 4.5% range.
So here we are again. Home Depot had another blowout quarter. Revenues and earnings again both topped expectations. Comparable sales were up 6.3% versus expectations for a 4.9% gain. Gross margins were essentially flat, and operating margins improved due to operating expense leverage.
But even those solid results didn’t excite investors. HD stock dropped about 3% after its Q2 report. Why? Other retailers put up pretty ugly numbers, and that is killing sentiment related to all things retail.
LOW Stock Is Nearing A Valuation Bottom
It’s unlikely Lowe’s had the sort of quarter that will turn around what is currently significantly depressed sentiment in the retail sector. It’s more likely that Lowe’s had a sub-par quarter relative to Home Depot, and that LOW stock drops after its Q2 report, much like HD stock.
But that drop could be a buying opportunity.
Over the last 3 years, LOW stock has traded roughly between 10-times and 13-times trailing EBITDA. Right now, LOW stock is trading right around 10.9-times trailing EBITDA, near the bottom of that valuation range. According to YCharts, such valuation troughs have been good buying opportunities over the past three years (most recent examples include February 2017, November 2016 and February 2016).
But from that standpoint, there is still more room to fall. In each of those three time periods, the trailing EBITDA multiple fell to below 10.5-times.
LOW stock could head below a 10.5-times EBITDA multiple soon if its second-quarter report fails to meet expectations. In this downtrodden retail environment, it’s easy to see LOW stock taking a pretty big hit if the numbers aren’t up to par.
Bottom Line on LOW Stock
LOW stock is approaching value buy territory, but it’s not quite there yet. I am waiting for the EBITDA multiple to get to around 10.5-times before I start accumulating shares (currently around 10.9-times).
Fortunately, I don’t think I will have to wait long. Given how Lowe’s has under-performed Home Depot recently, and how Home Depot’s robust second-quarter numbers failed to excite investors, I think it’s likely LOW stock falls after its second-quarter earnings report.
That sell-off is where investors will want to start picking up the scraps.
As of this writing, Luke Lango was long HD.