Lowe’s (LOW) easily beat Q4 earnings forecasts but warned of slower sales, while higher mortgage rates pressure the housing market. But is Lowe’s stock a buy now?
The Mooresville, S.C.-based home-improvement retailer has posted double-digit profit growth for the last five quarters. But consumers may contemplate a shift in spending to activities outside the home as the vaccine rollout continues.
Lowe’s has more than 2,200 stores. It opened its first home-improvement store in 1946 and went public in 1961. In 2007, it opened its first stores outside the U.S., in Canada.
The company’s stock rose dramatically in the early 1990s, in step with the growing interest in DIY home-improvement trend. Indeed, HGTV launched in December 1994. That year, Lowe’s had net sales of $6.1 million. By 2019, that figure grew to $72.1 billion.
Lowe’s Stock Fundamental Analysis
On Feb. 24, Lowe’s reported Q4 EPS of $1.33, beating analyst views for $1.20. Sales jumped 27% to $20.3 billion, above expectations for $19.33 billion. Same-store sales surged 28%, while U.S. comps grew 28.6%.
But continued costs related to Covid will put pressure on profits. In its Q4 earnings report, Lowe’s said Covid-related costs to support hourly front-line workers totaled more than $100 million in Q4 and more than $900 million for fiscal 2020. Overall, Lowe’s said it has invested nearly $1.3 billion in Covid-related support for its associates, store safety and community pandemic relief in fiscal 2020.
“Strong execution enabled us to meet broad-based demand driven by the continued consumer focus on the home, with growth over 16% in all merchandising departments, over 19% across all U.S. regions and 121% on Lowes.com,” CEO Marvin Ellison said in a statement. “Looking ahead to 2021, we expect to grow market share and drive further operating margin expansion.”
Despite the earnings beat, Lowe’s reiterated the forecast it gave at an investor day in December.
CFO David Denton also warned Feb. 24 that home-improvement sales would likely decline as more people get vaccinated and venture outdoors more. He said demand for the home improvement sector could drop 5%-10%.
That came a day after rival Home Depot (HD) also beat earnings views and announced a 10% dividend hike to $1.65 a share.
According to the IBD Stock Checkup, Lowe’s boasts a three-year EPS growth rate of 21%. Its three-year sales growth rate is 6%.
But growth is expected to take a breather next year as it comes up again tougher comparisons. Wall Street sees EPS increasing around 5% to $9.12 on a revenue decline of about 3.5% to $85.4 billion.
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Lowe’s Stock Technical Analysis
Shares soared more than 30% in 2020, but they have since taken a breather. LOW stock sold off after the Q4 report and now is back below the 10-week moving average. It had been working on a buy point of 179.56 from a cup-with-handle base, according to MarketSmith chart analysis.
The relative strength line is trending downward. The RS line tracks a stock’s performance vs. the S&P 500 index. Lowe’s RS Rating is 52. The RS Rating tracks a stock’s performance compared to all stocks over the last 12 months, with emphasis on the past three months.
Lowe’s stock has an EPS Rating of 96. Lowe’s stock has a 90 out of a possible 99 Composite Rating. The Composite Rating lets investors measure a stock’s fundamental, technical and fund sponsorship quality compared to other publicly traded companies.
Lowe’s ranks No. 2 in IBD’s Retail/Wholesale-Buildings Products group. Tractor Supply Co. (TSCO) ranks No. 1. Home Depot ranks No. 16.
Institutional ownership tells investors analysts at those firms have looked at Lowe’s and like what they see. There were 2,978 funds that hold LOW stock as of December 2020. The Vanguard Group is the largest shareholder with around 8% of shares outstanding. The second and third largest shareholders are BlackRock (BLK) and State Street Global Advisors with about 5% each.
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Lowe’s Focus On Professional Builders
The retailer has been shifting its focus to contractors recently. Lowe’s CEO Marvin Ellison said at recent investor update day that the company’s “strategy will enhance customer engagement and grow market share by intensifying our focus on the Pro customer, expanding our online business, modernizing installation services, improving localization efforts and elevating our product assortment.”
Wolfe Research analysts covering Lowe’s stock note the company’s efforts include a refreshed loyalty program and a new nationwide tool rental program.
In December, Lowe’s laid out its growth plans in a report titled “Total Home.” The crux of the plan is to redouble its efforts in capturing a larger share of the contractor market. The retailer hopes to double its revenue from professional builders to 50%. That would bring it on par with rival Home Depot.
Sales per square foot at Lowe’s have long lagged that of key competitor Home Depot by about 30% over the past five years, Wolfe analysts say. That’s due to “a function of differences in store footprint, service levels, and exposure to the pro customer,” they wrote.
And the rivalry is about to get more fierce. Home Depot bought HD Supply (HDS) late last year, reuniting with its former subsidiary in an $8.7 billion purchase.
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Will Vaccine Pump Brakes On Remodeling Trend?
News of coronavirus vaccines brought hope for looser social distancing. Does this mean shoppers curb spending on their homes in favor of entertainment and travel?
Some of them probably will, and the warning from Lowe’s CFO after the Q4 results backed those concerns.
Still, mass vaccination will take months, and new strains could reduce their effectiveness.
Lowe’s isn’t waiting for foot traffic to pick up to make changes to its store layout to improve operating margins. The plan is to make it easier and faster for shoppers, especially pros, to find what they need based on the project they’re working on.
That might mean stocking roofing tiles and roofing nails in the same aisle and not on opposite ends of the store.
“The program is set to take shape throughout Q3 and Q4,” Wolfe Research analysts wrote. Analysts say Lowe’s is targeting professionals because they spend about five times as much as the typical DIY customer each year.
On Jan. 28, Lowe’s also announced plans to bolster its sales staff to prepare for spring, its busiest season. Lowe’s is hiring more than 50,000 seasonal and full-time retail associates, building on the more than 90,000 associates hired into permanent roles over the past year, it said in a statement.
Lowe’s is also awarding more bonuses. Full-time hourly associates will receive $300, and part-time and seasonal associates will receive $150. This will be the seventh bonus or special payment Lowe’s has provided to hourly associates during the pandemic.
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Is Lowe’s Stock A Buy Now?
The booming housing market gave Lowe’s stock and earnings a robust tailwind this year but growth is due to slow sharply soon and costs are rising.
Shares have come well off highs, and the relative strength line nose-dived starting in October, indicating severe underperformance vs. the broader market, and hasn’t rebounded back to earlier highs.
Bottom line: Lowe’s stock is not a buy right now as shares are not in a buy zone yet. Meanwhile, profit growth will be under pressure as Lowe’s continues to spend heavily on Covid safety measures.
Investors can check out IBD Stock Lists and other IBD content to find dozens of the best stocks to buy or watch.
Follow Adelia Cellini Linecker on Twitter @IBD_Adelia.
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