Now It’s All About Guidance; Lowe’s Shares Slump Despite Topping Estimates

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.

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.”

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.

Check out FX Empire’s earnings calendar

U.S. Market Wrap and Forecast for Tuesday

Weak price action targeted big tech stocks on Monday, dropping Nasdaq-100 to a three-week low. SP-500 posted smaller losses while the Russell-2000 retraced Friday’s trading range, with the outperformance consistent with positive seasonality.  The WTI crude oil contract surged above 61 after Brazil’s strongman installed an army general to run Petróleo Brasileiro S.A. (PBR), one of the world’s largest oil and gas multinationals. That stock fell more than 20%.

Tesla Breaks Down

Tesla Inc. (TSLA) broke support near 780, completed a double top breakdown, and closed below the 50-day EMA for the first time since November. Dow component Apple Inc. (AAPL) fell nearly 3%, dropping into negative 2021 returns. Boeing Co. (BA) initially shook off the 777 grounding, squeezing short sellers after dropping more than 9%, but still closed in the red. Royal Caribbean Group (RCL) acted like a momentum play despite a billion dollar loss, surging to a 52-week high.

Gold had a strong session while Bitcoin faltered, lifting the yellow metal to the highest high in a week. Bonds slumped at 11-month lows while the 10-year Treasury note lifted above 1.3%, renewing anxiety about surging inflation. Kohl’s Corp. (KSS) rose over 6% as activist shareholders tried to take over the boardroom, just ahead of department store earnings that should confirm miserable conditions in America’s shopping malls.

Homebuilders on Tap

Tuesday’s Home Depot Inc. (HD) earnings will set the tone for mega-caps, with the housing boom likely to translate into a strong quarter. NVIDIA Inc. (NVDA) volatility is surging ahead of its Q4 release later this week. Bears could have the final say, given sell-the-news reactions after other chip reports in the last month. Square Inc. (SQ) could also generate fireworks after its report, with the stock glued to an all-time high after massive upside in the last 11-months

Home Depot will provide just one metric in a week chock-full of housing catalysts.  Home price data will also be released in Tuesday’s pre-market, followed by mortgage applications, January new home sales, and Lowe’s Cos. Inc. (LOW) earnings on Wednesday. Existing home sales wraps up the data flood, telling market players to keep close watch on SPDR S&P Homebuilder’s ETF (XHB), which is trading at an all-time high.

For a look at all of this week’s economic events, check out our economic calendar.

Three Top Earnings Plays This Week

Major indices sold off this week one year ago when a Kirkland, Washington nursing home reported the first non-travel related COVID cases in the United States. The rest is history, with major benchmarks crashing to multiyear lows, ahead of a relentless recovery underpinned by massive government stimulus programs. Those greenbacks continue to guide price action in 2021, with banks and recovery plays outperforming while pandemic beneficiaries falter.

The next act of this real-life soap opera comes in Monday’s pre-market, when Royal Caribbean Group (RCL) is likely to report another quarter of staggering losses.   Dow component Home Depot Inc. (HD) heads the week’s blue chip earnings schedule on Tuesday while rival Lowe’s Cos. Inc. (LOW) follows on Wednesday. Hot rocket NVIDIA Inc. (NVDA) also reports mid-week, with investors confident the stock will trade above 1,000 in coming years.

Royal Caribbean

Royal Caribbean is expected to report a Q4 2020 loss of $4.99 per-share after posting a $1.42 profit in the same quarter last year. That was also the last quarter the cruise operator made money or had a full fleet sailing around the world. RCL has gone to the capital markets several times since then, attempt to stay afloat, which takes on special meaning in this case. As with other battered leisure segments, the company is counting on vaccines to get them back in business.

Home Depot

Wall Street analysts are looking for Home Depot to earn $2.37 per share on $27.1 billion in Q4 2020 revenue. The stock cleared February 2020 resistance in May and posted an all-time high at 292.95 in August. It failed an October breakout attempt and has traded in a narrow range since that time, working off 2020’s outsized share gains. With the pandemic receding, the retailer could trade higher on a booming housing market and the strengthening U.S. economic outlook.

NVIDIA

NVIDIA is expected to report another strong quarter on Wednesday, with analysts predicting a Q4 2020 profit of $1.98 per-share on $4.82 billion in revenue. The stock just nosed above the September peak at 589.07 but a breakout will require a buy-the-news reaction after the report. That isn’t a sure thing after Advanced Micro Devices Inc. (AMD), the other beneficiary of Intel Corp. (INTC) missteps, sold off in January despite beating top and bottom line estimates.

For a look at all of this week’s economic events, check out our economic calendar.

Disclosure: the author held no positions in aforementioned securities at the time of publication. 

U.S. Market Wrap and Forecast for Monday

Early buying pressure faded during Friday’s expiration session, dropping major indices into the red. WTI crude oil reversed, dropping below 60 as temperatures lifted above the freezing mark in Texas and southern states. The 30-year bond posted another monthly low, continuing the relentless rise in yields across short- and long-dated instruments. Gamestop Inc. (GME) hit a monthly low, forcing another batch of Reddit traders to look for a less stressful hobby.

Roku Rocks

Roku Inc. (ROKU) posted a Q4 2020 profit of $0.49 per-share, well above expectations for a $0.03 loss, lifting the streaming hardware provider to a three-day high. However, rich valuation weighed on buying interest, stalling price well below Tuesday’s all-time high at 486.72. Deere and Co. (DE) reported the second blowout quarter in a row, lifting the agricultural giant to an all-time high above 330. The stock rose more than 55% in 2020 and has added another 20% so far in 2021.

Russell-2000 index ignored blue chip selling pressure, lifting into the midpoint of the weekly trading range. This instrument has rallied 55% since September, carving one of the strongest small cap buying waves since the 1990s. Speculative fervor in the Reddit crowd is driving the upside, with SPACs acting as petri dishes for hundreds of start-up operations. Unfortunately, most small caps won’t succeed down the road due to roadblocks set up by trillion dollar mega-techs.

Post-Options Hangover Ahead

Discovery Inc. (DISCA) could provide early metrics on the paid streaming service it launched in January in Monday’s pre-market earnings release. Home Depot Inc. (HD) and Lowes Inc. (LOW) lead next week’s blue chip calendar, highlighting do-it-yourself income during the pandemic’s second wave. The bubble in mall anchors could break after department stores release miserable quarterly results, which should confirm the slow bleed of long-term customers.

Consumer confidence and durable goods head next week’s economic calendar, along with new home sales. Millennials have entered their nesting stages, scooping up the limited supply of existing homes and driving prices to all-time highs. The supply crunch is forcing many nest builders to take advantage of remote work opportunities and build homes far away from west coast and northeast urban centers, in a phenomenon that will alter US demographics for decades.

For a look at all of today’s economic events, check out our economic calendar.

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

Lowe’s Q2 Earnings Surge on Solid Sales Amid COVID-19 Restrictions; Buy with Target Price $190

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.