LOW

Lowe's Companies, Inc.

177.36
USD
1.54%
177.36
USD
1.54%
170.12 263.31
52 weeks
52 weeks

Mkt Cap 122.81B

Shares Out 692.43M

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Lowe's Companies Is At The Top Of Its Class

Summary Lowe’s Companies Inc. is amongst the largest US retailers within the home improvement sector. Where giant retailers felt the pressure of the current inflationary climate on their earnings, the home improvement sector remained largely unaffected. Lowe’s demonstrated stellar growth in earnings, and surpassed analyst expectations by a significant margin, showcasing the high growth potential it holds. In terms of valuation metrics, LOW has the highest potential undervaluation, delivering the greatest value in terms of its market price. I believe Lowe's Companies Inc. (NYSE:LOW) is a buy, as it has immense potential, given the present macroeconomic climate, and the undervaluation that it holds, relative to its competing peers. Although its earnings report shows mixed results, I would place my bets on LOW, as opposed to any competitors, as I shall demonstrate below. Lowe's Companies, more commonly referred to as Lowe's, is a giant American retailer of home improvement products, which has a market capitalization of over $120 billion as of May 2022. Being such a major North American retail entity, the business is typically mentioned alongside retail industry giants such as Walmart (WMT), Target (TGT), and Home Depot (HD). The company has a presence in the US, Canada, and Mexico through its various stores. The business' core customer base is generally divided into 2 distinct categories which include Pro, which refers to professional customers, such as construction trades or repair and maintenance firms. Similarly, in addition to Pro, Lowe's is also focused on DIY (Do It Yourself) customers, looking to purchase Lowe's products for use within their own homes or businesses. At present, Lowe's is focused on an acceleration of market share capture which it attempts to undertake in various diverse and dynamic modes. The first aspect of this strategic objective is to ensure market penetration into both its Pro market segment as well as an expansion of its installation services. Lowe's corporate strategy further emphasizes the need to drive localization, with local market needs, whether situated in a rural, urban or coastal context, being prioritized within stores. Finally, the company has been making strides in the digital space, coming up with sophisticated digital tools for consumers such as Lowe's Kitchen Design Tool® and Measure Your Space. Lowe's, along with other giants in the US retail industry is being closely watched by market analysts, especially in the context of the present inflationary climate. There is much talk as to what the impacts of the interest rate hikes would be on the performance of these businesses. What has been found, especially following the recent earnings release by companies for the F22Q1 period, is that some sectors have arguably been faring better than others, by a substantial degree. Retail giant, Walmart found that price-sensitive customers were the first to adjust their spending habits in the wake of record-high inflations, due to which it had taken a severe financial hit in its performance in the prior quarter. Target too saw a significant fall in profits due to the same reason, with the demand for several products falling substantially. Passing on the cost of inflation to consumers proved critical for the performance of the retail sector. Home improvement stocks such as Home Depot and Lowe's were amongst the winners, in the wider retail spheres. The stellar performance showcased by each of the two companies was a clear indication that the macroeconomic shock had done little to impact the spending patterns of the home improvement markets. A large reason behind this is presumably the fact that the overwhelming majority of DIY customers are homeowners, who have profited heavily from rising prices in commodities. It is for these broader reasons that the earnings of home improvement stocks remained unaffected by adverse macroeconomic conditions, and hence its stock price did not take a fall, whereas retail giants such as Walmart and Target did. This difference in impact can be observed in the price movements of the prior month up to 20 May 2022, below: Earnings Evaluation The F22Q1 earning's release for home improvement stocks has been the talk of the town, after the surprise it delivered, despite looming economic uncertainty. LOW, being a giant in this domain, was one stock whose earnings had made the spotlight. LOW's EPS during the first quarter of 2022 stood at $3.51, climbing up from the prior year's comparable figure of $3.21. This denoted a year-on-year increase of an impressive 9%, against the estimates of analysts, who projected only a 0.9% growth figure. These conservative estimates by analysts related largely to macroeconomic stresses, and uncertainty, which had no adverse impact on Lowe's. However, despite the stellar growth in earnings, LOW did lag in its revenue figure, with its net quarterly figure of $23.66 billion falling short a slight 0.5% from analyst expectations of $23.77 billion. Moreover, the net sales figure further denoted a drop from the prior year's comparable figure of $24.42 billion, marking a fall of over 3% on a year-on-year basis. This drop in revenue was understandably concerning, given that the company's main competitor Home Depot, performed better on this metric, as it had seen a climb in net revenue by 3.8%. Similarly, its rival brought in a gain of 2.1% in its net earnings over the year, as opposed to its figure of 0.52%. Home Depot's EPS gain of 6% however had fallen short of the impressive 9% gain netted in by Lowe's Companies. The earnings results are understandably mixed for Lowe's, especially upon considering where it stands in relation to its core competitor on these metrics. Also, investors may stand divided on what to make of its impressive earnings growth, yet the decline in net revenue. I believe the best differentiating factor, in this case, is to determine how much progress each company had made in terms of its cash flow from operations. In this regard, LOW saw a change of -33.7% on a year-on-year basis, compared to a nearly 40% drop by HD. Therefore, in terms of change in cash delivered primarily through business operations, I believe Lowe's stands as a clear winner. Valuation The financial results presented above may or may not build a strong case for LOW, especially in comparison to its most serious competitor, Home Depot, but its valuation metrics may paint a clear picture. The table below indicates the largest home improvement stocks in the market, and where each stand, in relation to the price the market has set: Company Market Cap P/E Forward P/E P/S Return on Investments EPS growth this year EPS growth past 5 years EPS growth quarter over quarter Operating Margin Price Lowe's Companies, Inc. 123B 15.7 12.73 1.28 46.80% 55.30% 28.20% 34.30% 12.60% 181.37 The Home Depot, Inc. 290B 18.54 16.68 1.93 46.20% 30.10% 19.20% 21.30% 15.20% 281.45 Floor & Decor Holdings, Inc. 7.2B 26.38 18.49 1.95 18.80% 43.60% 41.40% -6.80% 9.10% 66.93 Leslie's, Inc. 3.1B 25.17 15.55 2.21 -330.10% 112.40% -17.90% 15.30% 17.55 As can be seen, by the figures above, it is apparent that based on earnings, future expected earnings, as well as sales, LOW is priced significantly below all of its peers. This emphasizes the degree to which the stock is undervalued, and hence the growth expectation investors can expect in their investment amounts. EPS growth for LOW stands above its competitors in terms of performance based on the prior quarter, prior year, as well as prior five years. The stock is the fastest growing and is going all in to take the top position in the industry. Moreover, in addition to being the most undervalued player in the home improvement realm, LOW is also number one in its ROI figure. This is a green flag for the company, indicating it is the most efficient investment option in the home improvement sector. One area where LOW falls short in comparison to its competitors is in terms of operating margin, which is an indication that the company needs to achieve cost optimization, to enhance its value delivering capability. Although the home improvement sector showcased that its performance did not fall, despite macroeconomic conditions, it may not indefinitely be able to remain immune against these broader stresses. While it is true that Lowe's primary market is an economic segment that can tolerate the burden of inflation being passed on toward it, growth under this assumption cannot be sustained in the long term. For LOW to remain financially sustainable, a healthy economic environment would be fundamental, as the number of homeowners would see a steady rise, as would the demand for LOW products. Similarly, uncertainty in the broader economy would also impact LOW's financial position to a substantial degree. With the record-high interest rate hikes, the company's cost of capital could rise by a significant degree, thus impacting its return on investment figure. While this is true for every company situated within the economy, this would be particularly impactful on LOW, given its consistently increasing portion of debt finance. This is demonstrated in the graph below: Conclusion Given the downturn of most consumer-centric industries, the home improvement sector has shown strong resilience to the prevalent economic conditions, making the sector a great investment choice for market participants to consider. LOW in particular is a great stock and, despite the mixed reactions it had gotten out of its recent earnings release, has a highly attractive growth record. Its clear undervaluation in comparison to peer firms, as well as its high return on investment, indicate it as delivering the highest value for the lowest price. This article was written by Stocks Telegraph is a dynamic team of financial market wizards with over 40 years of combined experience covering US stock markets. We hope to cover a wide range of stocks, asset classes, and investment strategies with a primary emphasis on what we perceive to be hidden gems scattered across the financial markets. Our articles integrate both top-down and bottom-up research methodologies, drawing upon detailed company-specific financials and macroeconomic analysis. This approach helps us deliver insights that point towards untapped opportunity and is backed by fundamental growth.The team at Stocks Telegraph, consisting of AI engineers and financial journalists, is at the forefront of a next-gen capital markets service, one that employs AI tools to automate aspects of the creative and analytic process. This encompasses all stages from initial research, and tracking stock data and news, to the creation of insightful reports.The brilliant minds at Stocks Telegraph are currently developing a robust AI tool to perform stock sentiment analysis through scanning digital content and news headlines. The goal of this tool is the prediction of stock movements by analyzing news headline tones and assessing market dynamics by utilizing data analytical functions.Our pipeline also includes plans to develop an automated tool capable of generating accessible earning insights, within minutes of official earning reports being published. Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Comment

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