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Lowe's

Lowe’s Companies Inc, a home improvement retailer, reported better-than-expected earnings in the fourth quarter, but shares slumped over 4% as the Mooresville, North Carolina-based company reiterated the scenario guidance given at their December Analyst Day.

The home improvement retailer reported net earnings of $978 million and diluted earnings per share of $1.32 for the quarter ended January 29, 2021 compared to net earnings of $509 million and diluted EPS of $0.66 in the fourth quarter of 2019.  The fourth-quarter adjusted diluted EPS increased by 41.5% to $1.33, beating the Wall Street consensus estimates of $1.20 per share.

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The company that distributes building materials and supplies through stores in the United States said its total sales for the fourth quarter were $20.3 billion compared to $16.0 billion in the fourth quarter of 2019, and comparable sales increased 28.1%.  Comparable sales for the U.S. home improvement business increased by 28.6% for the fourth quarter.

“Against very tough expectations, we think Lowe’s (LOW) results hit the bar, without clearing it by much. The comps were just about where they needed to be and the margins do look a bit better than Home Depot’s yesterday, which resulted in an EPS beat,” said Michael Baker, senior research analyst at D.A. Davidson.

“The guidance from the December analyst day was reiterated, which means forward numbers won’t change much. We continue to prefer LOW on more long-term margin potential and a lower valuation, with the offset being tougher comparisons post-pandemic due to their overexposure to outdoor and DIY relative to HD. Both of course are seeing strong momentum, including into February.”

The company reiterated its 2021 outlook that sales of between down 2% and down 7% from the “robust” through the “weak” scenarios.

Lowe’s shares, which surged 34% in 2020, slumped over 4% to $161.80 on Wednesday.

Executive Comments

“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.  I would like to thank our front-line associates for their continued dedication to serving our customers and communities and supporting safety in our stores,” commented Marvin R. Ellison, Lowe’s president and CEO.

“I am pleased with our progress in 2020 as we generated nearly $90 billion in sales, with annual sales growth of over $17 billion, while also enhancing our operating efficiency.  Looking ahead to 2021, we expect to grow market share and drive further operating margin expansion.”

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Lowe’s Stock Price Forecast

Fourteen analysts who offered stock ratings for Lowe’s in the last three months forecast the average price in 12 months of $197.08 with a high forecast of $212.00 and a low forecast of $170.00.

The average price target represents a 21.72% increase from the last price of $161.91. From those 14 analysts, 11 rated “Buy”, three rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $210 with a high of $270 under a bull scenario and $110 under the worst-case scenario. The firm gave an “Overweight” rating on the home improvement retailer’s stock.

“Q4 fine, though flow through could have been better. Still, results check the box for what’s priced in. Achieving the ’21 robust case key for the stock,” said Simeon Gutman, equity analyst at Morgan Stanley.

Several other analysts have also updated their stock outlook. Wells Fargo raised the price target to $200 from $190. Oppenheimer upped the stock price forecast to $200 from $180.

Moreover, D.A. Davidson increased the target price to $192 from $185. Baird raised the target price to $200 from $190. At last, RBC upped the stock price forecast to $190 from $181.

Analyst Comments

“We view Lowe’s (LOW) 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,” Morgan Stanley’s Gutman.

“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.”

Upside and Downside Risks

Risks to Upside: 1) Housing market remains strong, driving an acceleration in comps. 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.

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