Lowe's Earnings Could Beat Expectations

 | May 23, 2017 | 1:00 PM EDT
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Lowe's (LOW) reports its first quarter earnings before the market open on Wednesday. I am expecting another strong quarter from the home improvement retailer.

In March, I thought Lowes could trade into the low-to-mid $80s, based on a strong fourth quarter and bullish analyst meeting.

I also thought the stock would continue to post strong results as we head into the summer and I thought it was inevitable the shares would reach the mid $90s and set an all time high. I still think the stock can get into the mid $90s.

On Wednesday, Lowes is scheduled to report first-quarter fiscal 2018 earnings results before the market open. The analyst consensus is looking for earnings of $1.06 on revenue of $16.96 billion. Analysts think revenue will be up 11% and same stores sales will increase 2.6%.

Based on Home Depot's (HD) strong results the other day, I'd say those estimates are low. Last Tuesday, Home Depot reported first quarter earnings of $1.67, $0.06 better than expected. Revenues rose 4.9% to $23.89 billion. Comparable store sales were up 5.5%.

The home improvement sector is on fire. Home Depot said online sales increased 23% and big-ticket sales rose 15.8%. Appliances, flooring and roofing all posted strong results. In addition, Home Depot said it saw its best results in the Southern part of the United States. Recall that Home Depot only gets 25-26% of its sales from the South, while Lowe's gets nearly 40% of its sales from the South.

Home Depot's first quarter results were so strong, the company raised guidance for the full year. Management now see revenue growth of 4.6% to $98.95 billion and earnings of $7.15. Home Depot reaffirmed its full year comp sales estimate of 4.6%.

Obviously, the home improvement sector has a lot of momentum and Lowe's should be able to capture that strength. Furthermore, Lowe's is aggressively attacking the Pro market. At the last analyst meeting the company said, Pro sales accounted for just 30% of total revenue. This is low compared to Home Depot, which generates over 40% of sales to professional contractors. In coming quarters, investors will be watching the growth of pro sales.

Lowe's is also aggressively expanding into the maintenance, repair and operations (MRO) market. Last week, the company announced it reached a deal to acquire the Maintenance Supply Headquarters for $512 million. Maintenance Supply Headquarters (MSH) serves the multifamily residential housing market in the West, South Central and Southern United States. The company operates 13 distribution centers. Lowes stores are expected to carry MSH's inventory, which should help drive MSH customers to Lowes stores.

The deal is expected to be completed sometime in the second quarter, and should be accretive to earnings.

Over the past five years, Lowe's and Home Depot have significantly outperformed the S&P 500. In fact, over that period of time, it really didn't matter which one you picked. Home Depot edges out Lowes by just six points, but they both significantly outperformed the S&P 500. Over the last five years, the S&P 500 rose 87.2%, while the average between Home Depot and Lowes jumped 222%.

For the full year, I think Lowes's sales will increase 6% to $68.8 billion and earnings will rise 19% to $4.75 per share, which would be well ahead of the Wall Street consensus figures of $4.64 and $68.3 billion. For fiscal 2019, analysts are looking for sales to grow 3.9% to $69.8 billion and earnings to reach $5.29 per share.

I think earnings will be better than expected because of increasing operating margins, SG&A leverage driven by strong same store sales growth and aggressive share buybacks.

Because of the company's strong past performance, I think the shares should trade on a high teens multiple (19x). At 19x the fiscal 2019 estimate of $5.29, it's easy to see that the stock should reach the mid $90s.

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