Piper Jaffray's analyst Peter Keith recently upgraded shares of Lowe's (LOW, Financial) to Overweight citing a "confluence" of favorable tailwinds. Keith's recent survey showed 58% of U.S. households plan to spend more in 2015 versus a year ago with a "healthy" increase in spending per home project. The analyst sees various tailwinds that should drive comp growth of 5% for Lowe's over the next two years.
Piper Jaffray's analyst is not alone in terms of his positive take on the company. Analyst sentiments remain overwhelmingly positive on the company. Out of 29 analysts covering the company, 17 have buy ratings, 11 have hold ratings, and only one has a sell rating. Recently, another analyst –Â Oppenheimer's Brian Nagel –Â released a research report recommending investors to "keep buying" shares of the company despite a recent run up. He wrote,
"Recent data suggest solid, if not improving, consumer spending trends in the U.S. Significant slack remains at Home Depot (HD, Financial) and Lowe's and in the U.S. housing recovery. Prospects for a continued strong U.S. dollar should keep market participants interested in well-positioned domestic stock plays."
Another analyst, Barclays’ Alan M. Rifkin, believes that the company has "further opportunity to lever up" and drive shareholder value.
Lowe’s EPS has increased from $1.70 for FY2012 to $2.72 for FY2014. According to sell-side estimates, the company’s EPS will further increase to $3.31 in the current year and $3.94 next year. The company is benefiting from cyclical recovery in the housing market which is expected to continue going forward. The company is also doing a good job in terms of returning excess cash to shareholders. In the last year, the company repurchased $3.9 billion of stock and paid $822 million in dividends.
Going forward, in fiscal 2015, macroeconomic fundamentals are aligned for modestly stronger home improvement industry growth. Jobs, incomes, household financial conditions are expected to continue strengthening in 2015. This coupled with the sharp decline in energy prices should allow consumers to spend more on home improvement and other forms of discretionary spending.
In 2015, the company plans to further pursue top line growth by differentiating itself through better customer experiences and improving its product and service offerings for the Pro customer. In addition, the company continues developing omni-channel capabilities as part of its long-term commitment to meet customers on their terms, whenever and wherever they choose to engage with Lowe’s.
The company also remains committed to improving its productivity and profitability, with opportunities in a few specific areas, including store payroll, marketing and leveraging its scale to get cost savings on indirect spending. These efforts will likely lead to the continued outperformance going forward.
Lowe’s is trading at a forward PE of 18.88 and has a dividend yield of 1.20%. The company’s top line is expected to grow mid-single digits for the next few years as the housing recovery continues to take hold. I like the company giving strong cyclical recovery prospects and its history of returning cash to shareholders through buy backs and dividends.
