Stock Analysis & Ideas

Lowes Stock: Are Recession Fears Overdone?

Story Highlights

Lowes is a well-managed hardware firm that can’t seem to do any wrong. As the economy grinds to a slowdown, with a potential consumer recession in the cards, discretionary firms like Lowes could be most at risk of further downside.

Shares of home-improvement firm Lowes (LOW) have been feeling the pain of the consumer slowdown, with shares attempting to recover from a 35% fall from peak to trough.

Lowes and other discretionary hardware firms tend to be tough holds as the economy grinds to a halt. Hefty investments in home improvement just are not top of mind in the face of a downturn. Given the horrific food price inflation and surging costs of living, only the fortunate few can continue making extensive renovations to their homes when times get tough.

Though essential repairs will still spark some demand, it’s clear that Lowes is quite sensitive to the jittery consumer. At the same time, the severity of the coming economic slowdown or recession is a question mark. Many savers added to their nest eggs over the past two years. Some may still have enough savings to work on home improvement projects. However, I think it’s likelier that consumers will continue saving for a rainy day, as the forward-looking outlook seems so bleak.

Though we’re not yet in a recession or guaranteed to fall apart at the hands of the Fed, recent layoffs and hiring freezes are concerning. Mixed earnings and the questionable psyche of the consumer are also potential red flags that make buying a discretionary firm like Lowes akin to jumping head-first into a swimming pool, without knowing its depth.

Lowes is an incredibly well-run company that could have considerable bounce-back potential once headwinds fade and things don’t turn out to be as bad as the bears think. At writing, shares of Lowes trade at a modest 15.02 times trailing earnings, with a 2.3% dividend yield.

That’s an enticing value if we’re not headed for a stagflationary recession. That said, the stock may not be nearly as cheap as it looks if we’re in for a consumer recession that drags out through 2024. Though I applaud management for investing in areas to improve its longer-term fundamentals, it’s hard to gauge the severity of the storm clouds to come. For that reason, I am bearish on the stock.

On TipRanks, LOW scores a 10 out of 10 on the Smart Score spectrum. This indicates a high potential for the stock to outperform the broader market.

Lowes Can’t Control the Economy, but it can Prepare for the Rebound

Lowes is an excellent retailer on many metrics. That said, it cannot control which way storm clouds blow. What it can do is improve upon idiosyncratic factors to dampen potential downside brought forth by an economic slowdown and put itself on better footing ahead of the next expansionary cycle.

The company has done nearly everything right, driving efficiencies across the board while improving upon the customer experience. During pandemic lockdowns, the firm had a slight tailwind as shut-in consumers invested in home improvement.

Now that the economy has reopened, the pandemic tailwind has reversed course. Many consumers are feeling the pinch, and others have already spent on home improvement projects. While the post-lockdown “hangover” isn’t as severe as it is for the likes of a Peloton (PTON), it’s worth noting that demand can dry up very quick, given the cyclical nature of home improvement.

Further, as rates rise, a slowing housing market could lead to less spending on home improvement. Undoubtedly, many view improvements as an investment to score a higher price for their home on the housing market. Such a headwind may be less severe, but long-lasting in nature.

Despite the negatives, Lowes is taking steps to improve its margins. Recently, the company announced its intention to enter the metaverse, where consumers can help consumers visualize projects. It’s an intriguing tech investment, to say the least. And one that could spark considerable sales growth. Such a tool may even bring in crowds from competitors.

For now, virtual reality initiatives are unlikely to pay off until many years down the road. Once the recession passes and the economy is ready to charge higher, Lowe’s metaverse project could accelerate a rebound.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, LOW stock comes in as a Strong Buy. Out of 20 analyst ratings, there are 15 Buy recommendations and five Hold recommendations.

The average Lowes price target is $232.78, implying an upside of 26.36%. Analyst price targets range from a low of $190 per share to a high of $300 per share.

The Bottom Line on Lowes Stock

Lowes seems to be firing on all cylinders, with a solid first-quarter beat in the books, and a huge 31% dividend increase locked in. Despite the promising long-term fundamentals, the discretionary nature of the home improvement industry could work against LOW stock.

Sales have proven quite resilient thus far. However, as we inch closer to a Fed-induced slowdown, things can turn on a dime.

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