Lowe’s
proved, with its earnings this week, that it can hang in there during a rough stretch for the economy—and keep growing on the other side. That makes the stock worth owning, even after the 9% rally it has had since Barron’s recommended it on Jan. 25.
At a glance, the quarter didn’t look all that exciting. Sales, which fell 9.2% year over year to about $25 billion, were just in line with analysts estimates, as higher mortgage rates dented demand for housing-related goods. Lowe’s (ticker: LOW), though, was able to beat earnings-per-share forecasts thanks to rising gross profit margins—which got a boost from falling transportation costs—and continued share buybacks. It reported a profit of $4.56 a share, topping forecasts for $4.47.
Lowe’s also maintained its full-year guidance for sales of $88 billion, at the midpoint of the estimated range, and earnings of $13.40 a share. But the decision not to raise that forecast is nothing to worry about, either. Those numbers should have gone up, since the company is growing far faster quarter over quarter than year over year. Overall, this indicates that management is likely providing a conservative projection given the current economic conditions, making expectation-beating earnings more likely later this year.
“The near term is so choppy—it makes no sense to say, ‘Hey, we’re going to raise full-year guidance,’ ” says Edward Jones analyst Brian Yarbrough. “You’d rather…underpromise and overdeliver.”
Meanwhile, Lowe’s continues to grow its “pro” sales, which rose this past quarter. Pros, or home-improvement contractors, is an area where Lowe’s has been trying to make inroads. Historically dominated by
Home Depot
(HD), those sales tend to be steadier than for the do-it-yourself, or DIY, customer, which dropped more than 9% this past quarter.
Jefferies analyst Jonathan Matuszewski writes that he sees “powerful pro initiatives” continuing from here.
If Lowe’s can continue to grow the pro business as it takes market share from smaller companies, and DIY eventually stabilizes, sales should return to growth and drive earnings even higher.
Analysts’ consensus estimates call for annualized sales growth of just over 3% for the three years ending in 2026, to just over $97 billion in 2026, according to FactSet. Operating margins should rise toward Home Depot’s, which benefited from its prowess in the pro segment. Add in share buybacks, and earnings per share should grow about 12% a year, to about $18.62 in 2026.
That growth can take the stock higher—but so would a higher valuation. Lowe’s stock currently trades at about 16.5 times 12-month forward earnings, below Home Depot’s 20.8 times. As Lowe’s gets through the DIY rough patch, executes on its strategy, and moves its margins closer to Home Depot’s, its stock could command a higher valuation.
If Lowe’s can “grow earning by double digits, it could be a 20% compounder,” Yarbrough says of the stock. “You’ve got earnings growth, and then multiple expansion.”
Lowe’s doesn’t just improve homes. It can improve a portfolio, as well.
Write to Jacob Sonenshine at [email protected]
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