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Lowe’s Companies Inc, a home improvement retailer that distributes building materials and supplies through stores in the United States, said its net earnings surged more than 70% and total net sales jumped over 30% in the second quarter as consumers ordered more home improvement products amid COVID-19 restrictions.

The home improvement retailer reported net earnings of $2.8 billion and diluted earnings per share (EPS) of $3.74 for the quarter ended July 31, 2020, compared to net earnings of $1.7 billion and diluted EPS of $2.14 a year earlier. Second-quarter adjusted diluted EPS of $3.75 was 74% higher than adjusted diluted EPS of $2.15 same period last year.

Lowe’s said its sales for the second quarter were $27.3 billion, up from $21.0 billion in the second quarter of 2019, and comparable sales increased 34.2%.  Comparable sales for the U.S. home improvement business increased 35.1% during the period.

“We are increasing our fair value estimate to $133 per share from $111 after incorporating banner second-quarter results into our model. This included a stellar 34% comp growth and around 300 basis points of adjusted operating margin improvement as the company capitalized on its essential retailing status. Our medium-term outlook incorporates improvements to the supply chain, inventory management, and technology, bolstered by further investment in those categories. Our fair value estimate implies a 2021 price/earnings ratio of 15 times and an enterprise value/EBITDA multiple of 11 times,” said Jaime M. Katz, senior equity analyst at Morningstar.

“Post COVID-19, when demand normalizes, we expect throughput for home improvement products should depend mostly on changes in the real estate market, which are driven primarily by prices, interest rates, and turnover, given the maturity of the industry. We expect sales to grow at a low-single-digit pace over the long term (2%-3%, after rising 18% in 2020 in our forecast), supported by low-single-digit same-store sales (20% in 2020 and averaging about 4% over the next decade) and moderate location growth (netting 10 boxes per year after 2020), as from an online competitor;  shipping and returns are troublesome at best,” Katz added.

Lowe’s shares closed 0.2% higher at $158.28 on Wednesday. The stock is up over 30% so far this year.

Executive comments

“We delivered very strong second-quarter results, with all merchandising divisions posting comparable sales growth exceeding 20% and all U.S. geographic regions delivering comparable sales growth of at least 30%.  Sales were driven by a consumer focus on the home, core repair and maintenance activities, and wallet share shift away from other discretionary spending,” Marvin R. Ellison, Lowe’s president and CEO said in the statement.

“Looking ahead, our sales momentum continues into August, and we are investing in the business to further our omnichannel capabilities and position the Company to deliver long-term value to associates, customers and shareholders.”


Lowe’s stock forecast

Twenty-one analysts forecast the average price in 12 months at $166.24 with a high forecast of $193.00 and a low forecast of $130.00. The average price target represents a 5.03% increase from the last price of $158.28. All 21 analysts rated “Buy”, none rated “Hold” or “Sell”, according to Tipranks.

Morgan Stanley target price is $160 with a high of $230 under a bull scenario and $90 under the worst-case scenario. Lowe’s Companies had its target price upped by equities researchers at Robert W. Baird to $190 from $175. The brokerage presently has an “outperform” rating on the home improvement retailer’s stock.

Other equity analysts also recently updated their stock outlook. SunTrust Banks boosted their target price to $135 from $115 and gave the stock a “buy” rating. Telsey Advisory Group boosted their price objective to $175 from $140 and gave the company an “outperform” rating. Guggenheim reiterated a “buy” rating and issued a $135 target price. At last, Barclays upped their price target to $150 from $125 and gave the company an “overweight” rating.

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 view

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

“Assuming a healthy underlying housing backdrop, we think comps can accelerate 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,” he added.

Upside and Downside risks

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.

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.

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