"We expect continued, broad-based external pressures on our industry, as rising unemployment, falling home prices, tight credit and volatile equity markets continue to erode consumer confidence and impact sales."
That less than confidence inspiring statement comes from Lowe’s Companies, Inc. (LOW) CEO Robert Niblock. Is the worst over for LOW given the above statement? Investors are betting on it as shares were up more than 4% on Monday.
Perhaps investors were giddy that the company’s third quarter results of earnings of 33 cents per share on revenue of $11.73 billion beat analyst’s expectations of earnings of 28 cents per share on revenue of $11.62 billion.
Maybe, as I suspect, it’s just a relief rally as part of the third quarter for Lowe’s encompassed the dreadful month of October and investors were expecting results to be much worse.
When really bad news failed to materialize, shares of LOW took off.
They shouldn’t look a gift-horse in the mouth. If the past few months have taught us anything it’s to sell on strength. In other words, get out while the getting is good. While a company like LOW is solid, the company is at the complete and utter mercy of the broader economy
The news that we are in a recession is becoming more and more real. Some stated that they expect weakness in the economy for at least 14 months. That is not a good thing for LOW.
The home-improvement chain tried its best to dampen investors’ enthusiasm, saying that the environment will remain difficult through 2009 corresponding to current economist predictions. Indeed, Lowe’s has already dampened fourth quarter expectations by…
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…saying it expects to report a profit of just 8 to 16 cents per share. Analysts had been expecting earnings of 18 cents per share for the current quarter.
Results last quarter were boosted by an active hurricane season along the Gulf coast, but shoppers also pulled back on big-ticket items such as kitchen cabinets and washing machines which are often financed with credit. The lack of available credit and consumers’ own deteriorating balance sheets practically ensures there will be no quick rebound in big-ticket items.
LOW’s said same-store sales, a key retail industry metric, sank 5.9 percent in the third quarter. It was also the company’s fifth consecutive quarter of lower profit. It’s slowing its new store openings for 2009 to between 75 and 85 from a planned 120 new openings in 2008 as a result of the weakening economy and the continuing crisis in the housing market.
There are just too many headwinds facing LOW’s to make me want to speculate with the shares at this moment in time. Until housing turns around, or at least foreclosures begin to mitigate these shares will likely be under pressure. Who wants to improve a property that may be underwater for the homeowner?
There are still plenty of reasons to be concerned. Add in rising unemployment and what is sure to be a weak holiday season and the future does not look good for LOW in the short term.
If today’s buyers of Lowe’s stock think the bad news is out regarding the economy, they will be very disappointed when Lowe’s announces fourth quarter results in my opinion. You can’t say they haven’t been warned.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.
