Lowe's Value Is Improving Ahead of Third-Quarter Earnings

Lowe's, the world's second-largest home-improvement retailer, is growing earnings and revenue at such a strong pace that the stock is still a good buy despite its premium P/E ratio.
By Richard Saintvilus ,

Since falling to a September low of around $66, Lowe's (LOW) - Get Report has made several new highs, climbing as much as 12%. Like its corporate slogan, "Never stop improving," the stock is now up more than 2% in 2015 and is up 20% in the past twelve months, outpacing not only the S&P 500 (SPX) index, but also the SPDR S&P Retail ETF (XRT) - Get Report , which is down about 12% on the year.

Lowe's, the world's second-largest home-improvement retailer behind Home Depot (HD) - Get Report , reports third-quarter results Wednesday before the opening bell. And despite the relative outperformance of its stock, it would seem analysts expect the momentum which began with its August report to continue. This is based on the rising earnings estimates Lowe's is seeing for the just-ended quarter.

Just in the past 30 days, the Mooresville, N.C.-based retailer has seen projected earnings per share for the quarter climb from 76 cents a share to 78 cents. During that span, estimates for the quarter to end in January also climbed from 57 cents a share to 59 cents. Put them together and Lowe's is now on track to grow fiscal 2015 earnings by more than 21% to $3.28 a share. This earnings growth rate would be five percentage points faster than Home Depot's.

For that kind of earnings growth rate -- which happens to be four times the growth rate of the S&P 500 index -- you might expect to pay a huge premium for the stock. But  fiscal 2015 estimates of $3.28 put its forward P/E at 22 -- just five points higher than the forward P/E of the S&P 500. For many other stocks, an above-market P/E rate would imply lack of value. But project the numbers out to fiscal 2016, when Lowe's is expected to earn $3.94 a share, and it becomes clear that this company is on track to grow 2016 earnings at a rate of more than 20%.

There aren't many S&P 500 stocks growing their earnings in back-to-back years at over 20% while remaining relatively cheap. Plus, now that there are clearer signs that residential home construction has begun to improve, according to the Census Bureau, Lowe's revenue and profits in the quarters and years ahead should improve, too. More homes sales naturally translates to higher demand for things like lumber, flooring and appliances sold at its stores.

So, while Lowe's stock -- at 24 times earnings -- may not scream "bargain" today, it still possesses tons of value, which is reflected in its consensus buy rating and its average analyst 12-month price target of $81, 15% higher than current levels. Combined with its 28-cent quarterly dividend that yields 1.70% annually, that's makes it a strong buy candidate.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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