Just before the market correction driven by the coronavirus pandemic, Lowe’s Companies (NYSE:LOW) was trading at a high of $126.73. LOW stock subsequently plunged and briefly traded around $60.
A strong relief rally has followed; driven by the $2 trillion stimulus package that has taken the stock higher. However, I believe that it’s too early to assume a market bottom and further correction will be an opportunity to accumulate the stock. This column will discuss the factors that make Lowe’s Companies worth considering.
It’s likely that the unemployment rate in the U.S. will increase to 13% by May 2020. Federal Reserve Bank of St. Louis President James Bullard predicts an unemployment rate of 30% by the second quarter of fiscal year 2020. Therefore, as the lockdown impacts businesses, the real impact will be felt in the coming quarters. This will keep the markets jittery.
However, there are optimistic views as well. Michael Levitt, a Nobel laureate, is predicting a quicker coronavirus recovery. Michael Levitt has correctly predicted the end of the outbreak in China and this adds credibility to his views.
Another optimistic view comes from a research by Harvard Business Review. Research shows that, “V-shapes monopolize the empirical landscape of prior shocks from an economic recovery perspective.”
The overall objective of this discussion is to underscore the following point: There is economic pain ahead and LOW stock can trend lower again. However, renewed growth is likely to be strong and there is no reason to panic. Instead, accumulating quality stocks should be the objective and Lowe’s Companies is worth considering.
Lowe’s Companies Business Impact
Last week, Lowe’s CEO Marvin Ellison opined that “As customers are sheltering in place, they’re looking at that deferred list of home projects.” Further, the company is still hiring for the spring season.
This might indicate that there is limited initial impact of the coronavirus driven crisis on the company’s revenue. This is a key positive and the management has not withdrawn or revised its earnings forecast.
However, Marvin Ellison also pointed to the fact that the company is making special payments to full-time and part-time employees. Even if I assume that revenue is not impacted in an optimistic scenario, the company’s margin is likely to be hit.
Further, it remains to be seen if the demand from consumers remains at the same level in the coming quarters. If the unemployment rate indeed surges close to 30%, consumer spending will be impacted.
It’s worth noting that Scotts Miracle-Gro (NYSE:SMG) has guided for Q2 2020 revenue above consensus. The reason is demand for edible gardening, professional growing and pest control.
Therefore, there are indications of resilient demand. This can translate into LOW stock outperforming the index.
Valuation Perspective and Risk Factor
For FY2020, Low’s Companies is expecting earnings per share of $6.45 at the low-end of the guidance range. Considering the current stock price of $86.98, LOW stock is trading at a price-to-earnings ratio of 13.5.
The Home Depot (NYSE:HD) is trading at a P/E of 18.6 and Scotts Miracle-Gro is trading at a P/E of 19.6. Therefore, from a valuation perspective, the stock is not expensive. My only concern is renewed broad market correction, which can take the stock lower in the near-term. Gradual accumulation on correction is possibly the best strategy as uncertainty on the extent of slowdown sustains.st
One of the risk factors is that Lowe’s Companies and Home Depot have 30% of products sourced from China. The impact of supply chain disruption will be evident in the coming months. Another risk factor is margin compression that I already discussed. It can impact the diluted EPS even if revenue guidance is on-track.
My Concluding Views on LOW Stock
Some analysts are talking about the recent stimulus-driven
rally as a “dead cat bounce.” This can be potentially true and renewed broad market correction will give investors a chance to buy quality stocks at mouth-watering valuations.
LOW stock is worth keeping in the investment radar with the company having a decent balance sheet and a robust free cash flow.
Once the coronavirus driven economic crisis is over, the stock can deliver robust returns in addition to attractive dividends.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.