Lowe’s Is An Attractive Buy Ahead Of Q1 Earnings

The Analysts Build Up Expectations For Lowe’s 

The analyst’s activity in Lowe’s (NYSE: LOW) has been heating up over the last month. The company is slated to report its Q1 earnings next week and it could be a blowout report. The consensus estimate for both revenue and earnings growth shows a sequential acceleration that has YOY growth on track to slow but to a still-robust 20% rate. This includes the impact of recent upgrades from the community that have sentiment and the consensus price target edging higher. It does not, however, factor in the possibility Lowe’s will blow past these targets driven by strength in housing and consumer/homeowner trends. 

At $187.76 the consensus price target is below the current price action but does not fully reflect the recent trend. Over the past month, there’ve been 8 analyst calls, all bullish, with 3 rating upgrades and 5 price target hikes. Of those 8, the consensus for the share price is closer to $226 or about 12% upside and we think that target is a little low. 

Analyst Michael Lasser of UBS: "While it’s widely expected that HD and LOW will report strong SSS (same-store sales) we believe the degree of the flow-through that both retailers will generate will push the consensus forecasts meaningfully higher. Plus, the companies will provide indications that the momentum can continue even as they encounter tough compares."

Lowe’s Is A Value For Dividend-Growth Investors 

Lowe’s presents a value relative to the broad market by trading at 19X this year’s earnings compared to 22X for the broader market. At the same time, the company is in much better financial shape and pays a very safe 1.25% dividend as well. In our view, the company should not only be able to sustain its 57-year history of increases but also its high 16% distribution CAGR. Home Depot, on the other hand, yields closer to 2.0% but trades at a 24X/23X multiple and with a less robust outlook for dividend growth. Home Depot has a 12-year history of dividend increases and should be able to sustain future increases but at a reduced rate to the current 20% CAGR. Home Depot’s payout ratio is closer to 50% of earnings which greatly reduces its ability to sustain robust increases. 

Analyst Brian Nagel of Oppenheimer: "For a while, we have maintained a largely cautious and selective stance towards consumer, and in particular shares of key COVID-19 winners, upon concerns of a forthcoming post-pandemic normalization in spending and more challenging comparisons. We are not signaling an 'all clear' for LOW or our coverage, broadly. Instead, our refreshed, more upbeat call on Lowe’s is largely tactical in nature and hinged upon prospects for a continued flow of funds into more cyclically focused equities and a now historically discounted valuation versus that of Home Depot."

The Technical Outlook: Lowe’s Pulls Back Ahead Of Earnings 

Shares of Lowe’s were not immune to the malaise that gripped the market this week. The stock pulled back a little more than 5.0% in what looks like a knee-jerk reaction to news. The price action is already finding support at the 30-day moving average where think buying could be strong enough to hold prices up. If not, shares of Lowe’s may pull back into a deeper correction with a possible bottom at $180. The risk for investors is the earnings report next week and how the market reacts. We are sure the report will be good, possibly much better than consensus, the question is whether the stock will be rewarded for it. So, while Lowe’s is an attractive buy going into earnings it is also a risky one that bears caution. Even if the earnings report is good there may still be a better time to buy.