Shares of home improvement retailer Lowe’s Companies, Inc. (LOW) are currently trading 29.1% below their 52-week high of $263.31, which they hit on December 13, 2021. The company offers a line of construction, maintenance, repair, remodeling, and decorating products.

The pandemic benefited LOW as the stimulus checks enhanced consumers’ focus on improving their homes. However, 2022 brought new challenges for the company as customers faced rising prices and economic uncertainty, forcing them to spend less on home improvement. However, the company’s comparable sales for the U.S. home improvement business increased 0.2% in the fiscal second quarter (ended July 2022).

On November 3, 2022, LOW announced that it had entered into a definitive agreement to sell its Canadian retail business to Sycamore Partners for $400 million in cash and performance-based deferred consideration. The Canadian retail business operates or services approximately 450 corporate and independent affiliate dealer stores under different banners, including RONA, Lowe’s Canada, Réno-Dépòt, and Dick’s Lumber.

The divestment of its Canadian retail business is expected to enhance LOW’s operating margin and ROIC. LOW’s Chairman, President, and CEO Marvin R. Ellison said, “The sale of our Canadian retail business is an important step forward simplifying the Lowe’s business model.”

For fiscal 2022, LOW guided total sales between $97 billion and $99 billion, including the 53rd week. Its comparable sales are expected to range from a decline of 1% to an increase of 1%, while its operating income as a percentage of sales is expected between 12.8% and 13%. The company guided the full-year EPS between $13.10 to $13.60. It also expects an ROIC of over 36%.

Post the announcement of the sale of its Canadian retail business Marvin R. Ellison said, “While this business represents approximately 7% of our full-year 2022 sales outlook, it also represents approximately 60 basis points of dilution on our full-year 2022 operating margin outlook.”

“We remain confident in our short and long-term outlook for the U.S. business, underscored by improved sales trends and strong profit flow-through in the third quarter, as well as our expectations for solid business performance for the remainder of 2022,” he added.

The stock has declined 27.8% in price year-to-date and 20.2% over the past year to close the last trading session at $186.63.

Here’s what could influence LOW’s performance in the upcoming months:

Mixed Financials

LOW’s net sales declined marginally year-over-year to $27.47 billion for the second quarter ended July 29, 2022. Its net earnings declined 0.9% year-over-year to $2.99 billion.

The company’s operating income increased 0.5% year-over-year to $4.23 billion. In addition, its EBITDAR increased 9.3% year-over-year to $15.04 billion. Its EPS came in at $4.67, representing an increase of 9.8% year-over-year. Also, its return on invested capital came in at 34.5%, compared to 29.1% in the prior-year quarter.

Favorable Analyst Estimates

Analysts expect LOW’s EPS for fiscal 2023 and 2024 to increase 12.1% and 6.6% year-over-year to $13.50 and $14.39, respectively. Its revenue for fiscal 2023 and 2024 is expected to increase 0.6% and 0.3% year-over-year to $96.83 billion and $97.16 billion, respectively.

High Profitability

In terms of the trailing-12-month net income margin, LOW’s 8.83% is 65.7% higher than the 5.33% industry average. Likewise, its 15% trailing-12-month EBITDA margin is 35.8% higher than the industry average of 11.05%. Furthermore, the stock’s 1.98% trailing-12-month asset turnover ratio is 95.2% higher than the industry average of 1.02%.

POWR Ratings Show Promise

LOW has an overall rating of B, equating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. LOW has a B grade for Quality, consistent with its higher-than-industry profitability.

LOW is ranked #13 out of 60 stocks in the Home Improvement & Goods industry. Click here to access LOW’s ratings for Growth, Value, Momentum, Stability, and Sentiment.

Bottom Line

LOW’s divestment of its Canadian retail business is expected to significantly improve its operating margin and return on investment capital (ROIC). It is also expected to create greater shareholder value. In addition, the company remains confident of solid business performance for the rest of 2022. Wall Street analysts expect the stock to hit $231.75 in the near term, indicating a potential upside of 24.2%.

Given its favorable analyst estimates and high profitability, it could be wise to buy the stock while its price is still low.

How Does Lowe’s Companies, Inc. (LOW) Stack up Against Its Peers?

LOW has an overall POWR Rating of B, equating to a Buy rating. You might want to consider investing in the following Home Improvement & Goods stocks with an A (Strong Buy) or B (Buy) rating: Acuity Brands, Inc. (AYI), HNI Corporation (HNI), and Bassett Furniture Industries, Incorporated (BSET).

LOW shares were trading at $203.26 per share on Thursday afternoon, up $16.63 (+8.91%). Year-to-date, LOW has declined -19.90%, versus a -16.59% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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