Lowe’s Companies (LOW), has definitely benefitted from the pandemic. Lowe’s operates as a home improvement retailer with 1,974 stores globally. With people stuck at home, many decided to work on renovations.
Before the pandemic, Lowe’s was accustomed to seeing single-digit revenue growth. Thanks to pandemic-related changes to daily activities, revenues grew by 24.2% in 2020, while earnings saw growth of 41.2%.
However, it is likely that the company will return to single-digit growth once things go back to normal. As a result, we are neutral on Lowe’s. (See Lowe’s stock charts on TipRanks)
Lowe’s Growth Catalysts
The home improvement retail industry is expected to grow at a CAGR of 3% during the forecast period of 2021 to 2026. Although this doesn’t sound exciting, it shows that the industry is healthy.
Lowe’s controls about 12% of the market, with its main competitor, Home Depot (HD), controlling 17%. What’s interesting is the fact that the 2 companies combined have only a 29% market share. Considering how dominant they are, we expected a much larger share. As it turns out, the industry is quite fragmented, meaning it is a highly competitive market that lacks highly dominant players. Among Lowe’s larger competitors are Menard Inc., Walmart Inc. (WMT), and ADEO.
This fragmentation gives larger players such as Lowe’s a competitive edge over the smaller rivals. With more money to reinvest than smaller competitors, Lowe’s earnings growth will likely outpace the industry growth of 3% and continue capturing more market share.
In addition, when organic growth begins to slow down, Lowe’s would be able to use its cash flows to acquire smaller competitors. Thus, it could act as an industry consolidator going forward, should it choose to do so.
Risks for Lowe’s
Purchasing a home is a big commitment for a buyer. The real estate market has been hot and the amount of money needed to purchase a home continues to increase. Therefore, a lot of new homeowners are likely tying up a lot of money.
We see 2 potential risks for Lowe’s. The first is that the more money that is tied up in simply purchasing a home, the less the amount left over to spend on home renovations. Nonetheless, this doesn’t appear to be a concern so far, as earnings are expected to continue growing.
The second risk we see is the potential for a slowdown in the housing market. This scenario could potentially cause people to reduce the amount of money they invest in their homes.
On the other hand, according to RBC, home equity levels are at an all-time high, and equity usage has been dropping for 10 years straight. Thus, people are deleveraging, meaning that the main cause of rising real estate prices is supply and demand. This is in stark contrast to the irresponsible lending practices that took place in the 2000’s.
Wall Street’s Take
Turning to Wall Street, Lowe’s has a Moderate Buy consensus rating, based on 7 Buys, 1 Hold and 0 Sells assigned in the last three months. The average Lowe’s price target implies 11.3% upside potential.
Lowe’s is a great company with a dominant position in its industry. However, a likely return to single-digit growth might slow down the stock’s future returns.
Disclosure: At the time of publication, Stock Bros Research did not have a position in any of the securities mentioned in this article.
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