Lowe’s Forecasts Q4 Sales to Grow 15-20%; Buy with Target Price $190

Lowe’s Companies Inc forecasts total and comparable sales growth of 15% to 20% in the fourth quarter, but higher investment in COVID-19-related support for its associates, store safety and community pandemic relief will likely weigh on earnings.

The home improvement retailer reported net earnings of $692 million and diluted earnings per share of $0.91 for the quarter ended October 30, 2020. Excluding charges, third-quarter adjusted diluted EPS increased 40% to $1.98 from adjusted diluted EPS of $1.41 in the third quarter of 2019, a tad higher than the market expectations of $1.97 per share.

“The EPS was only slightly above consensus as expenses were higher than we modelled. The guidance was mixed. Thus, with the stock up 33.5% year-to-date, we expect a bit of a give-back today even with the stock at relative discount of 19.3x consensus forward estimate compared to HD at 22.7x, the S&P 500 at 23.0x and our group average of 21.5x,” said Michael Baker, MD and Senior Research Analyst at D.A. Davidson & Company.

Lowe’s said its sales rose to $22.3 billion in the third quarter, up from $17.4 billion in the same period a year ago, and comparable sales climbed over 30%.  Comparable sales for the U.S. home improvement business also jumped more than 30% for the third quarter.

The company that distributes building materials and supplies through stores in the United States said it invested $245 million in COVID-related support of frontline hourly associates, bringing its total COVID-related associate financial support to more than $800 million this year.

With the extra sending, Lowe’s forecasts diluted earnings per share and adjusted diluted earnings per share between $1.10 – $1.20 per share, compared with Wall Street estimates of $1.17 per share. For fiscal 2020, the company expects capital expenditures of about $1.7 billion.

“Shares are off as investors look past 30% comps and a robust 4Q sales guide and focus on 2H margins below Street expectations. Lowe’s has stood apart from peers in ’20 given its ability to fulfil record demand, but also now for its bold decision to pull forward investments (while competitors delay). This weighs on margins near-term, though we have no doubt these actions will amplify share gains ahead. Reiterate Buy,” said Jonathan Matuszewski, equity analyst at Jefferies, who gave a price target of $202.

At the time of writing, Lowe’s shares traded 5.83% lower at $150.54 on Wednesday. However, the stock is up over 25% so far this year.

Executive Comments

“Strong execution enabled us to meet continued broad-based demand, as we delivered over 15% growth in all merchandising departments, over 20% growth across all geographic regions. and triple-digit growth online.  We continued to invest in the future growth of the company, including a $100 million investment in the quarter as part of an ongoing effort to reset the layout of our U.S. stores, making them easier to shop with improved product adjacencies, especially for Pro customers,” said Marvin R. Ellison, Lowe’s president and CEO.

“Our omni-channel transformation continued in the third quarter with further investments in Lowes.com and our supply chain.   I remain confident that we are making the right strategic investments to deliver sustainable, long-term growth.  I would also like to thank our outstanding frontline associates for their unwavering commitment to customer service and safety,” R. Ellison added.

Lowe’s Stock Price Forecast

Nineteen equity analysts forecast the average price in 12 months at $193.11 with a high forecast of $315.00 and a low forecast of $159.00. The average price target represents a 28.16% increase from the last price of $150.68. From those 19 analysts, 16 rated “Buy”, three rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $190 with a high of $260 under a bull-case scenario and $110 under the worst-case scenario. The firm currently has an “Overweight” rating on the home improvement retailer’s stock. Lowe’s Companies had its target price increased by Telsey Advisory Group to $190 from $185. The firm currently has an outperform rating on the home improvement retailer’s stock.

Several other analysts have also recently commented on the stock. Zacks Investment Research raised shares of Lowe’s Companies from a hold rating to a strong-buy rating and set a $187 price objective. BNP Paribas initiated coverage on shares of Lowe’s Companies and set a neutral rating and a $159 price objective. Barclays upped their target price on shares of Lowe’s Companies to $180 from $150 and gave the company an overweight rating in August. On the other hand, ValuEngine lowered shares of Lowe’s Companies from a hold rating to a sell rating last week.

We think it is good to buy at the current level and target $190 as 50-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity.

Analyst Comments

“We view Lowe’s favourably given its longer-term transformation opportunity and structural industry tailwinds, with substantial near-term uplifts from COVID-19 spending shifts that likely translate to longer-term sales retention,” said Simeon Gutman, equity analyst at Morgan Stanley.

“Assuming a healthy underlying housing backdrop, we think comps can accelerate longer-term from stronger sales/sq ft trends, driven by e-comm accelerating, better in-stocks, product refreshes/exclusive launches, greater traction with Pro initiatives, and removing friction from the customer shopping experience,” Gutman added.

Upside and Downside Risks

Risks to Upside: 1) Housing market remains strong, driving an acceleration in comps. 2) Margin initiatives gain momentum, driving achievement of 12% EBIT margin target (9.1% in 2019) faster than expected – highlighted by Morgan Stanley.

Risks to Downside: 1) Slowing housing market & deterioration in the competitive landscape. 2) Execution missteps cause flow through to be weaker than expected. 3) Gross margin stagnation/contraction as it nears peak levels.

Check out FX Empire’s earnings calendar