Lowe's (LOW) fourth-quarter results are expected to show just how strong the housing market is in the U.S., as consumer confidence continues to remain strong and people are putting money into their houses left and right.
2016 was the best year for existing home sales in a decade, according to Realtor.com, a website which tracks home sales. 5.45 million existing homes were sold, as the housing market continues to recover from the problems seen in the mid 2000's. Lowe's and competitor Home Depot (HD) have benefited greatly as a result, analysts noted.
"[I]ndustry demand should remain healthy, possibly accelerate, and the relative strengths of this category should allow for relative multiple expansion and outperformance as we move through 2017," Credit Suisse analyst Seth Sigman wrote ahead of earnings.
Despite the astounding strength, there are a few causes for concern, most notably input costs as inflation starts to rise.
One area of concern is lumber, which accounts for 13% of sales at Lowe's, according to BMO Capital Markets analyst Wayne Hood.
Hood noted that lumber prices have risen to $391 per thousand board foot, up from $313 per thousand board foot at the start of 2016. This trend may wind up slowing down construction, as the process gets more expensive and consumers rethink purchases and improvements.
"As prices rise, there is a benefit to SSS growth, but the category can be a drag on [gross margin] rate if it grows as percentage of sales. SG&A dollars would benefit as hours would not be added on the incremental dollars from rising prices," Hood wrote ahead of earnings. "That said, sustained rising lumber prices could raise the cost of new home construction, slowing the construction market."
That may have impacted pending home sales in January, which dropped to the lowest levels in a year. As a result, investors will be looking for further clarity on the market from Lowe's when it gives its commentary following earnings.
Analysts surveyed by Yahoo! Finance expect the company to earn 79 cents a share on $15.39 billion in revenue for the fourth quarter.
Over the past 12 months, shares of Lowe's gained nearly 12% excluding dividends, compared to the near 25% gain in the S&P 500.
Here are five ETFs that may benefit if investors like Lowe's fourth-quarter results.
VanEck Vectors Retail ETF
The $96.5 million VanEck Vectors Retail ETF (RTH) has Lowe's make up 4.87% of its portfolio, charging investors an expense ratio of 0.35%.
Jefferies analyst Daniel Binder expects that home improvement spending is likely to remain healthier than other parts of retail, despite tough comparisons from last year. "A favorable consumer backdrop and rising home prices continue to support strong sales, but we are keeping a watchful eye on key macro data as we have seen modest softening in the y-y growth rates for jobs and wages," Binder wrote ahead of earnings.
Jefferies has a hold rating and a $78 price target on Lowe's shares.
SPDR Homebuilders ETF
The $1.12 billion has SPDR Homebuilders ETF (XHB) has Lowe's make up 4.51% of its portfolio, charging investors an expense ratio of 0.35%.
Credit Suisse's Sigman noted that expectations for Lowe's have risen sharply recently, but "strong Q4 results, on top of a difficult comparison, should ease concerns about an even more difficult Q1 comparison."
iShares U.S. Home Construction ETF
The $1.13 billion iShares U.S. Home Construction ETF (ITB) has Lowe's make up 3.12% of its portfolio, charging investors an expense ratio of 0.43%.
With economic optimism rising, there's been some concern that an increase in interest rates, along with concerns about free trade, could impact Lowe's results. However, the company has taken to reducing expenses, BTIG analyst Alan Rifkin noted, which should help reduce some of the uncertainty.
Vanguard Consumer Discretionary ETF
The $2.04 billion Vanguard Consumer Discretionary ETF (VCR) has Lowe's make up 2.09% of its portfolio, charging investors an expense ratio of 0.12%.
BTIG's Rifkin, who has a buy rating and a $80 price target, noted that any recomposition of NAFTA by President Donald Trump could impact Lowe's results in a material way. "With 7% of revenue from Canada, the potential impact of NAFTA renegotiations could also be a topic, though we view risk as minimal as Mexico is the focus of renegotiations," Rifkin wrote ahead of earnings.
John Hancock Multifactor Consumer Discretionary ETF
The $26 million John Hancock Multifactor Consumer Discretionary ETF (JHMC) has Lowe's make up 1.68% of its portfolio, charging investors an expense ratio of 0.50%.