Lowe’s Stock: Hold Now, Buy it When it Dips
Lowe’s Companies (NYSE: LOW) stock is in a holding pattern after the Q2 results revealed operational quality offset by a weakened sales outlook. The critical takeaway is that macroeconomic conditions impact sales while operational quality improves. As bad as the guidance seems, it’s not as bad as was feared, and the company is set up to gain leverage when the economy rebounds. Among the critical details are improving sales in the Pro segment, the company’s primary growth avenue today, and solid cash flows that can sustain the capital return program.
The only truly bad detail in the report is that share repurchases have slowed and will likely remain weak until business improves systemwide. Until then, investors can bank on the dividend, which trades at a premium relative to historical norms. Trading at 20x earnings, Lowe’s is a value compared to the 10-year average 22.5x P/E multiple and its largest competitor, Home Depot (NYSE: HD), which trades at an even higher multiple.
Lowe’s Reports Mixed Results, Cuts Guidance
Lowe’s reported mixed results for Q2, impacted by slowing DIY sales, big-ticket item sales, and weather, offset to a small degree by improving Pro sales. The company reported $23.59 billion in net revenue, which is down 5.5% compared to last year and 160 basis points shy of the consensus. Comps are down -5.1%, offset by an increased store count, with DIY sales down nearly double digits and Pro up mid-single-digits.
Margin news is also mixed, with Margin contraction at every level but less than analysts forecast. The gross Margin contracted by 20 basis points, SG increased by 50 basis points, the operating income Margin increased by 100 basis points, and the net income Margin increased by 50. The salient detail is that the $4.10 adjusted EPS is down 10% YoY but outpaced consensus by a dime, providing sufficient cash flow to sustain share repurchases, dividends, and balance sheet improvements.
Guidance will move the market over the next few days and weeks. The company lowered its guidance significantly, putting the new high-end range below the prior low-end range, but based on the market response, investors were expecting much worse.
Lowe’s Capital Returns Are Safe: Repurchases Slowed in Q2
Lowe’s results drove sufficient cash flow to sustain the capital return, but a problem will undercut the upside share price potential over the next quarter.
The company’s repurchases slowed by 60% to only $1 billion in Q2 and will likely remain muted until business picks up again. Repurchases in Q2 helped reduce the count by 2.5% on average for the quarter, a pace investors should expect to slow in the fiscal year’s second half.
The dividend remains safe despite the slowdown in repurchases. It is worth about 1.9%, with shares trading near $240, and is less than 40% of the renewed guidance.
Distribution increases are also likely to continue, but, as with the repurchases, investors should expect the pace of growth to slow over the next two quarters.
Analysts Hold Lowe’s but View its Stock as Fairly Valued
The initial analysts' response to Lowe’s results is favorable. The few revisions issued immediately after the report reiterate ratings and price targets aligning with the Hold consensus and the $250 price target. The caveat is that the consensus price target assumes the stock is fairly valued at the current price point and is unlikely to move higher soon. The risk for investors is that the consensus will falter over the coming weeks, adding downward pressure to the market.
The price action is bearish going into the open following the release. The market is down about 1% but still above critical support, so the downside may be limited. Critical support is near $240 and may hold despite the weak report. In that scenario, investors should expect to see this market trend sideways until more news is out, including updates on inflation and the outlook for FOMC rate cuts. If the market falls below $240 and can not rebound quickly, it could revert to its trading range with a chance of moving to $215 or lower.
Source MarketBeat
