Lowe’s (LOW, Financial) recently reported slightly lower than expected results missing EPS estimates by a cent. The company’s US same store sales growth of 5.3% was lower than Home Depot’s (HD) 7.1%. The stock corrected post results. However, UBS analysts don’t think that investors should be worried about the miss and believes that recent correction is a buying opportunity. He said,
“I think especially on the heels of what Home Depot reported yesterday, there were some expectations that the comp gap between Home Depot and Lowe’s would narrow down today. It remained in about an average positioning, so, the market is taking some profits on that.
We think that this pullback today has created an opportunity to buy a retailer that’s got great long-term positioning at a less expensive valuation because our view is that estimates aren't really going to change after today’s release.”
He maintained his target price of $84 on the stock.
Lowe’s Companies, Inc is the world’s second largest home improvement retailer. As of January 30, Lowe's operated 1,840 home improvement and hardware stores, representing approximately 201 million square feet of retail selling space. Lowe's is comprised of 1,793 stores located across 50 U.S. states, including 74 Orchard Supply Hardware (Orchard) stores in California and Oregon, as well as 37 stores in Canada, and 10 stores in Mexico. Lowe’s was incorporated in North Carolina in 1952 and has been publicly held since 1961.
The company serves homeowners, renters, and professional customers. Retail customers, comprised of individual homeowners and renters, complete a wide array of projects and vary along the spectrum of do-it-yourself (DIY) and do-it-for-me (DIFM). The Pro customer consists of two broad categories: construction trades; and maintenance, repair & operations.
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 $3.95 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 an outperformance going forward.
Lowe’s is trading at a forward PE of 17.40 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.
