Case Study: Lowe's (LOW) stock according to high performing analysts
Key Points
Performance
LOW shares fell by 0.55% this week, pushing their year-to-date gains down to 3.76%. This compares poorly to both the S&P 500 which is up by 9.97% on a year-to-date basis.
Event & Impact
Lowe’s posted its first quarter results this week, beating analyst consensus estimates on both the top and bottom lines. During Q1, LOW’s revenue totaled $22.35 billion, beating Wall Street’s consensus estimate by $670 million. Lowe’s Q1 non-GAAP earnings per share came in at $3.67, which was $0.22/share above consensus estimates.
Noteworthy News:
While LOW beat analyst estimates during Q1 its management team highlighted a slew of macroeconomic headwinds that is causing consumer weakness, leading it to lower its full-year sales and earnings guidance moving forward. However, Lowe’s management did show confidence this week, raising its dividend by 4.8%, marking the 60th consecutive year that Lowe’s has increased its annual dividend.
Nobias Insights
65% of recent articles published by credible authors focused on LOW shares offer a “bullish” bias. 4 out of the 7 credible Wall Street analysts who cover Lowe’s believe that shares are likely to rise in value. The average price target applied to LOW by these credible analysts is $223.86, implying an upside potential of approximately 8.4% relative to the stock’s current share price of $206.52.
Bullish Take Nobias 4-star rated analyst, Chris Graja of Argus, said, “Argus adds however that Lowe's remains well positioned to deliver future earnings growth and market share gains even as it navigates tighter monetary policy and consumers who have less money for discretionary spending.”
Bearish Take Salman Ahmad, a Nobias 5-star rated author, stated, “When the Coronavirus pandemic hit, home improvement retailers did well. Recently, they became popular defensive plays amid inflation and global recession fears. According to Lowe’s and Home Depot’s Q1 financial results, rising interest rates are stifling the mortgage refinancing book that drove pandemic-era sales, and consumers appear cautious amid recession fears.”
LOW May 2023
On a year-to-date basis, the S&P 500 is up by nearly 10%. When it comes to the major U.S. stock market indexes, the tech-heavy Nasdaq Composite is leading the way, up by 24.92%. And this divergence puts a spotlight on the underlying strength of the 2023 stock market rally; while it’s true that the broader indexes are up on the year, this is actually quite narrow.
Just a few big-tech stocks are accounting for the majority of the bullish momentum during 2023, driven by popular trends such as artificial intelligence. The major indexes are market cap-weighted, which means that the biggest companies will have the most significant impact on price movement. And this sets up an interesting dichotomy between the Main Street economy and the Wall Street economy (which is being largely driven by success coming out of Silicon Valley).
With regard to the health of Main Street, home improvement retailer Lowe's (LOW) often acts as a true barometer. Lowe’s reported earnings this week, which included lower forward guidance due to falling same store sales, signaling that the health of the average consumer is weakening.
This momentum was contrary to the bullish results posted by companies like Nvidia (NVDA) and Marvell Technology (MRVL), two leading semiconductor names in the artificial intelligence industry, which saw their share prices rise by 26% and 44%, respectively, this week alone.
“Real” economy plays like Lowe’s are underperforming in today’s tech-driven market environment. For instance, LOW shares are only up by 3.76% in 2023 so far. However, the credible author and analyst communities continue to express bullish bias towards LOW shares as a potential contrarian play relative to A.I. momentum.
Bearish Nobias Credible Analysts’ Opinions:
Salman Ahmad, a Nobias 5-star rated author, covered Lowe’s Q1 results in an article that he published at CTN News this week. Ahmad wrote, “Despite better-than-expected first-quarter results on Tuesday, Lowe’s (LOW) revised its full-year guidance as lumber prices dropped and home improvement enthusiasm faded.” He highlighted the macroeconomic pressures that Lowe’s faces at the moment, writing, “When the Coronavirus pandemic hit, home improvement retailers did well. Recently, they became popular defensive plays amid inflation and global recession fears. According to Lowe’s and Home Depot’s Q1 financial results, rising interest rates are stifling the mortgage refinancing book that drove pandemic-era sales, and consumers appear cautious amid recession fears.”
Looking at the company’s first quarter results, Ahmad said, “In Q1, Lowe’s reported EPS of $3.67, up 5% in comparison to $22.35 billion in revenue. In the first quarter, same-store sales declined 4.3%.” “Home improvement retailer Lowe’s reported lower comparable sales in Q1 due to a combination of falling lumber prices, unfavorable weather, and a decrease in discretionary sales,” he added.
Looking at the company’s updated future guidance figures, Ahmad wrote, “It now expects sales of between $87-$89 billion in 2023, down from the previous estimate of $88-$90 billion.” “According to the company,” he continued, “same-store sales will decrease between 2% and 4%. Adjusted diluted earnings per share are forecast at $13.20-$13.60, down from $13.60-$14.00 previously.”
Bullish Nobias Credible Analysts Opinions:
In an effort to respond to the post-pandemic slowdown, Parija Kavilanz, a Nobias 5-star rated author, notes that the company has developed a new strategy to pivot into rural markets in her recent article published at CNN.com.
“Lowe’s needs a new, more dependable engine for growth as sales slow in its vast fleet of urban and suburban retail stores. It appears to have found it: rural America,” she said. Kavilanz continued, “The home improvement chain said it’s rolling out a one-stop-shop store concept tailor made for shoppers living in rural communities. New or revamped stores will cater to that market’s indoor and outdoor needs with expanded product categories in pet, livestock, trailers, fencing, utility vehicles like ATVs, clothing and specialized hardware.”
“Lowe’s told analysts that it had piloted the rural store concept a year ago with successful results and was now expanding the idea into existing Lowe’s stores, primarily in the South, Midwest and Northeast throughout the summer,” Kavilanz wrote. Moving forward, she says that this is a 2023 growth story for the company.
During its recently quarter report, Kavilanz notes that, “Lowe’s ((LOW)) said it was scaling its rural store format to as many as 300 additional stores by year end for rural customers.” This is an interesting pivot by Lowe’s because the rural market is already dominated by Tractor Supply Company (TSCO). TSCO has grown its annual earnings-per-share for 14 consecutive years, with 10 of those annual EPS growth rates in the double digits.
However, Lowe’s $122.3 billion market cap is significantly larger than Tractor Supply’s $23.4 billion market cap, implying that Lowe’s has the cash flows to compete and potentially disrupt TSCO’s existing market share dominance. Either way, as Kavilanz points out, with urban/suburban sales slowing, Lowe’s wants a piece of the fast growing rural lifestyle market. Although Lowe’s share price has languished in recent weeks, the company continues to provide strong shareholder returns to investors.
During the company’s Q1 earnings conference call, Lowe’s CFO, Brandon Sink said, “During the quarter, the company generated $1.7 billion in free cash flow. We repurchased 10.6 million shares for $2.1 billion and paid $633 million in dividends at $1.05 per share, returning $2.8 billion to our shareholders.”
Also, this week, Lowe’s announced that it was increasing its annual dividend by 4.8%, from $1.05/share to $1.10/share. Lowe’s has increased its annual dividend for 60 consecutive years. Currently, LOW shares yield 2.13%. In response to Lowe’s Q1 report, Nobias 4-star rated analyst, Chris Graja of Argus, reduced his price target on shares, while maintaining a “buy” rating.
According to the Fly on the Wall, “Argus lowered the firm's price target on Lowe's to $250 from $290 but keeps a Buy rating on the shares after its Q1 results. The company's sales were down 5.6% as lumber deflation hurt the top line, the analyst tells investors in a research note. Argus adds however that Lowe's remains well positioned to deliver future earnings growth and market share gains even as it navigates tighter monetary policy and consumers who have less money for discretionary spending. The firm is cutting its FY24 EPS estimate to $13.45 from $13.84 and its FY25 estimate to $15.00 from $15.50 however.”
Scott Ciccarelli of Trust, a Nobias 4-star rated analyst, did the same thing. According to the Fly on the Wall, “Truist analyst Scot Ciccarelli lowered the firm's price target on Lowe's to $229 from $235 but keeps a Buy rating on the shares. The company's below-consensus outlook was widely expected given weather factors, lumber deflation, and a softer consumer spending environment, the analyst tells investors in a research note.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
The firm adds, however, that it remains bullish on the longer-term outlook as Lowe's earnings algorithm seems reasonably stable and its valuation at 15.5-times expected 2023 earnings helps provide support. Truist notes that if the Fed is done raising rates, then the stock will likely move ahead of fundamentals.”
In short, these two analysts were disappointed with Lowe’s falling sales and lowered guidance; however, they believe that shares are too cheap at their current cash flow multiples.
Overall bias of Nobias Credible Analysts and Bloggers:
Overall, 4 out of the 7 credible analysts that the Nobias algorithm tracks who cover Lowe’s stock believe that shares are likely to increase in value. Currently, the average price target being applied to LOW by these credible individuals is $223.86. Compared to LOW’s current share price of $206.52, this represents an upside potential of approximately 8.4%.
Combined with the stock’s 2%+ dividend yield, credible analysts are signaling double digit upside potential. The credible authors that Nobias tracks share this positive sentiment. 65% of recently published articles on LOW shares have expressed a “bullish” bias.
Disclosure: Nicholas Ward is long LOW and has no TSCO position. Nicholas Ward wrote this article for Nobias at their request with the intention of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.