Posting positive earnings results amid a downbeat market environment usually calls for celebration. Not surprisingly, home improvement retailer Lowe’s (NYSE:LOW) benefitted from intense demand on Wall Street. However, management also disclosed an optimistic view of the underlying economy that runs counter to the prevailing narrative. Therefore, investors should approach LOW stock carefully, for which I hold a neutral view.
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To be clear, the headline numbers imply that the naysayers may be talking themselves out of an upside opportunity. For the third quarter (ending Oct. 31, 2022), Lowe’s posted earnings per share of $3.27 on revenue of $23.5 billion. Both these stats beat their respective analyst targets, which called for EPS of $3.09 and top-line sales of $23.1 billion.
Better yet, management also boosted its expectations for full-year adjusted earnings to a range between $13.65 to $13.80 per share. Previously, the guidance called for $13.10 to $13.60 per share. On the revenue side, the company anticipates full-year sales of about $97 billion to $98 billion. Same-store sales are expected to be flat or down 1% from the prior year.
Overall, though, the leadership team took great encouragement from the Q3 report. Lowe’s Chairman, CEO, and President, Marvin Ellison, highlighted the “better-than-expected results this quarter,” noting improved do-it-yourself (DIY) sales trends.
Although LOW stock hasn’t performed well this year – declining about 18% on a year-to-date basis through the Nov. 18 session – it’s gained significant momentum recently. Over the trailing month, shares swung higher by over 15%.
Still, investors should be careful about overexposure to near-term trends that may not fully materialize over the long haul.
Management Bets Big on the LOW Stock Storyline
Naturally, Lowe’s executives kept piling on regarding the details of its surprisingly robust Q3 earnings report. Nevertheless, investors may benefit from a more realistic approach. In other words, it’s quite possible that the home improvement retailer is overplaying its hand.
“Consumer savings are near record highs, while disposable personal income remained strong … and this is why we’re so confident (about the industry outlook) even in a period of high inflation and rising interest rates,” Ellison stated, according to a Reuters article. However, this data point regarding consumer savings runs into two fundamental obstacles.
First, rival Home Depot (NYSE:HD) did not share such sentiments. Though it too beat quarterly estimates, the aforementioned Reuters report stated that Home Depot “left its annual forecasts unchanged despite beating quarterly estimates, citing caution over ‘mixed signals’ around demand.”
While Lowe’s asserts that “its customers were trading up and investing more in flooring, appliances, and kitchens,” Home Depot should likewise benefit from this trend. After all, LOW stock and HD represent almost-identical investments from a fundamental standpoint. Yet Home Depot refused to jump the gun.
Second, Lowe’s remarks about consumer savings contradicts government data. According to the U.S. Bureau of Economic Analysis, the personal saving rate dipped to 3.1% in September this year. That’s much lower than the post-Great Recession low, which sits at around 4.5%.
Stated differently, even though consumers may be buying up products at Lowe’s, this collective discretionary fund may soon dry up. Therefore, it’s imperative not to get too carried away with LOW stock. While the near-term narrative may be encouraging, a disappointing backdrop may be just around the corner.
Is LOW a Good Stock to Buy?
Turning to Wall Street, LOW stock has a Moderate Buy consensus rating based on 10 Buys, six Holds, and one Sell assigned in the past three months. The average LOW price target is $231.29, implying 10.17% upside potential.
Conclusion: Quantitative Data Supports a Slow Approach With Lowe’s
To be completely fair, the broader investment profile undergirding LOW stock presents an intriguing case. It’s just that prospective investors should be conservative in their approach rather than aggressively bidding up shares. For instance, the company delivers a healthy mix of top-and-bottom-line performance stats. Its three-year revenue growth rate (on a per-share basis) stands at 16.2%. This ranks above 80% of the competition.
Also, its free cash flow (FCF) growth rate during the aforementioned period is 24.1%, beating out nearly 63% of its rivals.
On the profitability front, Lowe’s net margin pings at 8.84%, ranking within the underlying sector’s top 20%. Also, it features a return on assets of nearly 18%, beating out nearly 95% of its peers, thus reflecting an extremely high-quality business.
However, where people might get into a bit of trouble is the valuation. Currently, LOW stock trades at 16.5x earnings. The assumption, per management, is that moving forward, key income-related statistics will improve. However, what if they don’t improve?
It’s a fair question because data from both Lowe’s rivals and the federal government indicate a questionable backdrop for the consumer economy. Therefore, being too aggressive with LOW stock could translate to exposure to an overvalued investment.
That’s not to say that LOW stock is a shorting opportunity – far from it. However, given the tough macro environment, investors need to be reasonable with their forward assumptions.
