We adopted a Neutral stance on Lowe’s Companies Inc. (LOW) with a target-price of $36.00, following its better-than-expected third-quarter 2012 performance. Earlier, we had an Underperform recommendation on the stock.
With the housing market still recovering at a soft pace, Lowe’s stronger-than-anticipated results came as a surprise. This second-largest home improvement retailer was one of the beneficiaries when Hurricane Sandy hit the U.S. east coast. Customers rushed to its outlets to get hold of flashlights, generators and batteries apprehending the storm and returned to buy materials for repairing purposes after Hurricane Sandy wreaked havoc.
Impressive 3Q Results
Lowe’s third-quarter 2012 earnings of 40 cents a share came ahead of the Zacks Consensus Estimate of 35 cents and rose 11.1% from 36 cents earned in the year-ago quarter. The company witnessed an increase of 1.9% in revenue to $12,073 million – following a decline of 2% in the second quarter – that also outpaced the Zacks Consensus Estimate of $11,923 million. A shift in the comparable week led to a decline in sales worth $62 million or 0.5%.
Comparable-store sales grew 1.8% during the third quarter after registering a drop of 0.4% in the second quarter. Lowe’s also indicated that comparable-store sales for the U.S. operations jumped 1.8%.
However, despite impressive results, Lowe’s continues to expect fiscal 2012 earnings of $1.64 per share. Management reiterated that total sales for fiscal 2012 (52-week) is expected to remain even with fiscal 2011 (53-week). Compared with a 52-week 2011, sales are expected to climb approximately 2%. Lowe’s now expects marginal growth of 1% in comparable-store sales.
Uphill Estimate Revision
Following Lowe’s inspiring third quarter results, the Zacks Consensus Estimates have been portraying an upward trend.
The Zacks Consensus Estimate for the fourth quarter of fiscal 2012 jumped by 3 cents to 23 cents a share in the last 30 days. For the first quarter of fiscal 2013, the estimate rose by a penny to 52 cents over the same time frame. The Zacks Consensus Estimates climbed 8 cents to $1.74 for fiscal 2012 and increased 6 cents to $2.08 per share for fiscal 2013 in the last 30 days.
Still Remains Cautious
Job losses in the recent past and reduced access to credit have led to a sharp fall in consumer discretionary spending on big-ticket items. With the global economic environment still not completely out of the woods, we believe that spending on big remodeling projects will likely remain under pressure until the housing market stabilizes and consumer-spending rebounds.
In the home improvement retailing business, Lowe’s faces stiff competition from The Home Depot Inc. (HD), Sherwin-Williams Company and other home supply retailers on attributes such as location, price and quality of merchandise, in-stock consistency, merchandise assortments, and customer service. This may weigh upon the company’s results.
Closing Comment
The performance of home improvement companies is directly proportional to the housing market cycle, which in turn is closely related to the existing economic conditions. A tremor at one end obviously makes its rippling effects evident on the other end, too.
The above analysis supports our unbiased view, and advocates our Neutral stand on Lowe’s, which is well defined through our Zacks #3 Rank that translates into a short-term “Hold” rating.
HOME DEPOT (HD): Free Stock Analysis Report
LOWES COS (LOW): Free Stock Analysis Report
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