Why Lowe's Shares Should Keep Improving After Earnings Report

NEW YORK (TheStreet) -- Lowe's (LOW), the world's second-largest home-improvement products retailer, will report first-quarter earnings Wednesday before the opening bell. And like its motto, "Never stop improving," investors are hoping that Lowe's will continue its upward climb on a better-than-expected report. But will it happen?

Last week's report showing that U.S. retails sales for the month of April were flat, missing the expected 0.2% growth, shouldn't be ignored. And when considering the report's upward revision of the March data, showing a 1.1% gain versus the prior reported 0.9% gain, the April month-over-month numbers appear even worse, adding risk to retail stocks. Still, all retailers are not created equal.

In the case of Lowe's, what's more important to consider are the gains the stock can yield with relatively low risk, given the company's recent moves. Lowe's has closed poor-performing stores, is improving its merchandising, and is actively looking for ways to make the shopping experience better.

In that regard, despite the downbeat April retail data, the Mooresville, N.C.-based retailer may have hit on a formula that will lead it to outperform, regardless of what the broader retail numbers may reveal in the months and quarters ahead.

Why the confidence? Lowe's has been through periods of weak retail spending before, and in this case, it's more important to consider the extent to which the U.S. housing market will continue to rebound. Analysts have forecast modest-to-higher home sales in the quarters ahead, which should benefit Lowe's.

This optimism has also crept into Lowe's estimates for the quarter that just ended. Over the past 30 days, the consensus estimate for last quarter has climbed 1.36% from 73 cents a share to 74 cents a share. Estimates for the quarter ending in July are also up by almost 1% in the past three months. And for the full year ending in January, earnings per share estimates have also climbed 1.2% from $3.27 per share to $3.31 per share.

This means Lowe's full-year earnings per share are projected to grow by 22.5%. And analysts have grown more confident about next year's results, raising estimates from $3.90 per share to $3.95, suggesting 20% earnings growth for 2016.

These upward revisions suggest analysts have had a hard time keeping up with the company's performance. Still, whenever estimates are being raised, particularly by analysts who cover the company and speak with management, it's usually a bullish sign about what's ahead.

The company has reaped the fruits of its extensive merchandising initiatives, which lead to higher fourth-quarter adjusted profits of 46 cents per share, topping estimates by 2 cents. Further, the company's fourth-quarter revenue grew 7.5%, reaching $12.54 billion, topping estimates of $12.29 billion.

Based on that, first-quarter revenue projections of $14.27 billion, implying 6.5% year-over-year growth, look conservative. To the extent Lowe's might have seen better sales for the just-ended quarter --  especially on remodeling and big ticket items -- its shares, which have an average analyst price target of $80, should spike upward.

In short, now is the time to build a position in Lowe's, which is projected to grow earnings long-term at more than 16% annually. Between its plans to close underperforming stores, its focus on upgrading its merchandising and customer experience, and its plan to improve its MyLowes web platform, which helps shoppers manage purchases and remodeling projects, Lowe's has plenty of tailwinds to lift it higher.

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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