What’s Next For Lowe’s Stock After It Has Doubled?

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Lowe's

After a 2x rise since the March lows of this year, at the current price of around $135 per share (as of June 23rd), we believe Lowe’s stock (NYSE: LOW) has reached its near term potential. The home improvement retailer has seen its stock outperform through the coronavirus crisis, rising by almost 12% year-to-date (compared to a 3% decline in S&P), benefiting from the stay-at-home bump. The coronavirus shutdown in the U.S. actually boosted Lowe’s business.

Lowe’s stock is already about 52% higher than it was at the end of 2017, a little over 2 years ago. Our dashboard, What Factors Drove 52% Change in Lowe’s Stock Between 2017 and Now?, provides the key numbers behind our thinking, and we explain more below.

Some of this growth over the last 2 years is justified by the roughly 5% increase in Lowe’s revenues from $68.6 billion in 2017 to $72.1 billion in 2019. In addition, earnings growth, on a per-share basis, was higher by 24%. This was driven by a 90 bps net margins expansion from 5.0% to 5.9% and a 7% decline in shares outstanding during this period.

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Finally, Lowe’s P/E ratio declined slightly from about 21.7x at the end of 2017 to 21.6x currently. The company’s P/E Multiple is yet to see a meaningful decline from the current 24x levels, which still remains 13% higher than the levels of 21x seen in 2019. We believe that the stock could remain rangebound around the current levels in the near term.

So how has Coronavirus impacted the stock?

Lowe’s has remained open as an essential retailer during the pandemic restrictions and has benefited from home improvement projects as well as people stocking up on cleaning supplies and safety-related products. In Q1, Lowe’s sales surged 7% year-over-year (y-o-y) to $19.7 billion and the cost of sales also decreased, which lead to a 28% increase in profits to $1.3 billion. In addition, same-store sales in the fiscal first quarter increased by 11.2%. This growth was attributed to strong sales of cleaning products, refrigerators, freezers, and DIY products, which all accelerated throughout the pandemic as more consumers stayed home. Many of these consumers went online to order the items they needed for their projects, boosting Lowe’s e-commerce sales by 80% y-o-y in Q1 (levels typically only seen during the Black Friday sales). In the upcoming Q2, Wall Street expects Lowe’s revenue and adjusted earnings to rise by 1% and 3%, respectively.

However, we believe the recent boost in sales might only be short-lived. This could likely be a result of a rise in unemployment and lower consumer sentiment, and its potential impact on holiday sales. Lowe’s also faces a long-term challenge of plunging new home purchases amid the pandemic. The company also continues to compete fiercely with Home Depot for a significant market share in the home improvement market. Going by our Lowe’s Valuation, with an EPS estimate of $6.31 and P/E multiple of 21.2x in 2020, this translates into a price of $134, which is roughly in line with the current market price.

While Lowe’s stock may not have much of a near term upside, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

Did you know that Home Depot stock has also fared well due to the stay-at-home bump? We discuss more on this here – What Factors Drove 40% Change in Home Depot Stock Between 2017 and Now?

In addition, our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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