Home improvement retailer Lowe’s Companies, Inc. (LOW), which is headquartered in Mooresville, N.C., operates a chain of retail stores that provide construction, maintenance, repair, and remodeling products in the United States and internationally. Shares of LOW have advanced 3.2% in price over the past five days and 28.5% year-to-date thanks to the company’s solid second-quarter earnings result, which beat the Street’s estimates. 

The company’s U.S. comparable sales grew 32% on a two-year basis, while its sales on Lowes.com increased 7% year-over-year. Also, following the strong financial results, management has lifted LOW’s full-year outlook. The company expects revenue of roughly $92 billion, representing comparable sales growth of approximately 30% on a two-year basis.

A significant improvement in demand for building equipment and materials from professional contractors because the rapid rollout of COVID-19 vaccines facilitated the resumption of projects that were put on hold last year should enable LOW to maintain a robust financial performance in the coming quarters.

Closing yesterday’s session at $205.65, LOW is trading just 4.4% below its 52-week price high of $215.22. Furthermore, continued work-from-home trends and a red-hot housing market should help it witness unprecedented demand in the near term.

Here is what we think could shape LOW’s performance in the coming months:

Bullish Analyst Sentiment

Analysts expect LOW’s EPS to increase 13.1% year-over-year to $2.24 in the next quarter ending October 2021. Its consensus EPS estimates indicate a 24.2% increase in the current year and a 7.3% increase next year. In addition, its EPS is expected to increase at a19.1% per annum rate over the next five years. LOW has an impressive earnings surprise history; it beat the Street’s EPS estimates in three of the trailing four quarters.

A $91.53 billion consensus revenue estimate for the current year represents  a 2.2% improvement year-over-year. Also, its revenue is estimated to increase 1.5% year-over-year to $92.95 billion in 2023.

Housing Market Tailwinds

Record-low mortgage rates, a strengthening job market, and growing personal savings have been fueling a residential housing boom in the United States. According to the National Association of Realtors, existing-home sales increased 2% on a seasonally adjusted annual rate from June to July, with no  sales declines in any regions. As a result, home improvement and renovation spending are expected to increase significantly in the coming months. With many homeowners rescheduling deferred projects, the home repair surge is here to stay. Furthermore, as the remote-working-and-learning trend continues due to the resurgence of COVID-19 cases, the desire for more comfortable living spaces is expected to drive the demand for products related to do-it-yourself projects.

This should bode well for LOW. As professional and do-it-yourself customers get back to their maintenance, repair, and upgrade jobs that were put on hold last year due to the pandemic, the company should see a substantial rise in demand for its  building tools and materials in the near term.

Solid Financials and Profitability

LOW’s total revenue grew marginally year-over-year to $27.57 billion in the second quarter, ended June 30, 2021. The company’s operating income came in at $4.21 billion, representing a 6.4% increase  year-over-year. Its net earnings were $3.02 billion, up 6.7% from the same period last year. In addition, its comprehensive income rose 1% from its  year-ago value to $2.96 billion. LOW’s EPS stood at $4.25 for the quarter, up 13.6% year-over-year.

The company’s 13.1% trailing-12-month EBIT margin is 46.4% higher than the 9% industry average. Furthermore,  the company’s 7.4% and 26.2% respective trailing-12-month net income margin and ROTC compare favorably with the  industry averages. In addition, LOW’s 333.9% trailing-12-month ROE is 1,848.7% higher than the 17.1% industry average.  Also, its  $6.21 billion trailing-12-month cash from operations is significantly higher than the $209.78 million industry average.

Consensus Rating and Price Target Indicate Potential Upside

Of the 29 Wall Street analysts that rated the stock, 18 rated it Buy, and six rated it Hold. The $226.79 consensus price target indicates a 10.3% potential upside from yesterday’s $205.65 closing price. The price targets range from a low of $198 to a high of $266.

POWR Ratings Reflect Promising Outlook

LOW has an overall B rating, which translates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. LOW has a Momentum Grade of B, which is consistent with its price returns year-to-date.

Also, in terms of Quality Grade, the company has a B. This justifies the company’s higher-than-industry EBIT margin.

Click here to see the additional POWR Ratings for LOW (Value, Growth, Sentiment, and Stability).

The stock is ranked #17 of 64 stocks in the B-rated Home Improvement & Goods industry.

Bottom Line

Robust growth in installation services and décor product categories, along with significant operating margin expansion, has led to LOW’s shares soar year-to-date. Furthermore,  as both professional and DIY customers resume their work on old projects, an increase in home improvement spending could boost LOW’s sales further. Therefore, we think it could be wise to bet on the stock now.

How Does Lowe’s Companies (LOW) Stack Up Against its Peers?

LOW has a B grade in our proprietary rating system. One may also want to check out these other stocks within the same industry with an A (Strong Buy) grade: HNI Corporation (HNI) and Mohawk Industries, Inc. (MHK).

LOW shares rose $0.51 (+0.25%) in premarket trading Friday. Year-to-date, LOW has gained 29.81%, versus a 20.46% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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