Market Overview

Earnings Preview: Lowe's Companies

Lowe's Companies (NYSE: LOW) is scheduled to report fourth-quarter 2011 results tomorrow, February 27, before the markets open. Last week, rival Home Depot (NYSE: HD) posted better-than-expected results, despite the weak housing market, due in part to better same-store sales and a mild winter season. Lowe's shares jumped to a 52-week high following Home Depot's report, as well as news of encouraging housing data, but then pulled back late in the week. Lowe's results for the quarter should offer a sign of the impact of its recent rebranding initiatives.

See also: Home Depot Rises on Strong Q4 Results

Analysts are looking for Lowe's to report that its per-share earnings came to $0.24 for the quarter and that revenue totaled $11.3 billion. In the same quarter of last year, the company posted $0.21 per share and $10.5 billion in sales. Note that the EPS estimate was a penny less some 90 days ago. Analysts' forecasts have been within a penny or three of EPS results in the past eight quarters, but Lowe's fell short in just one of those quarters.

Looking back to the previous quarter, Lowe's said net earnings came to $225 million, or $0.18 per share, a 44.3% decline from the same period of the previous year. But sales for the quarter increased 2.3% year over year to $11.9 billion The company attributed the disappointing results to restructuring costs and store closings and said it was making changes necessary to “right size” the organization, improve its core business and develop new capabilities and services. But adjusted EPS and revenues were both better than analysts had expected.

For the full year, the consensus estimate calls for $1.62 per share earnings, up from $1.44 the previous year. That EPS estimate has also inched up a penny in the past 60 days. And Lowe's full-year revenues are expected to have increased 2.2% year over year to $49.9 billion.

The Company

Mooresville, N.C.-based Lowe's Companies is the nation's second largest home improvement retailer, following Home Depot. Lowe's operates more than 1,700 stores in the United States, Canada and Mexico, as well as offering its products through catalogs and online at Lowes.com The company was founded in 1946 and now is an S&P 500 component with a market cap of $34.0 billion.

Competitors include Home Depot, privately owned Menard and Ace Hardware, Sears (NASDAQ: SHLD) and Tractor Supply (NASDAQ: TSCO). Home Depot offered fiscal year EPS and revenue guidance that was better than analysts' consensus forecasts. And Sears posted a worse-than-expected Q4 loss last week and said it would shed up to 1,250 less-profitable stores.

See also: Shares of Sears Soaring After News of $2.4 Billion Loss

During the three months that ended in January, Lowe's announced it would offer a new cloud-based home management system, the acquisition of online retailer ATG Stores, and plans for a new customer support center in Albuquerque, N.M. The company also was criticized for withdrawing its advertising from a television show about Muslims.

See also: Lowe's Companies Announces Acquisition of ATG Stores

Performance

Lowe's P/E and PEG ratios are less than the industry average. The company has a long-term earnings per share growth forecast of 13.3%, and its operating margin is better than the industry average. Short interest is 1.3% of the float. Of 29 analysts surveyed who follow the stock, 14 rate it a Buy or Strong Buy. Their mean price target on the shares is 4.4% higher than the current share price.

Shares have traded mostly between $26 and $28 since the beginning of the year. But the share price has risen 35.1% over the past six months, hitting a 52-week high of $28.46 last week. It is above the 50-day and 200-day moving averages, and the former has acted as support since October. The stock has outperformed Sears over the past six months but has narrowly underperformed Home Depot in that time.

ACTION ITEMS:

Bullish: Investors interested in exchange traded funds invested in Lowe's might want to consider the following trades:

  • PowerShares Dynamic Building & Construction (NYSE: PKB) is more than 15% higher year to date.
  • iShares Dow Jones US Home Construction (NYSE: ITB) is about 15% higher year to date.
  • SPDR S&P Homebuilders (NYSE: XHB) is almost 15% higher year to date.
  • Vanguard Consumer Discretionary ETF (NYSE: VCR) is more than 11% higher year to date.
Bearish:

Traders may prefer to consider these alternative positions in the same industry:

  • Builders FirstSource (NASDAQ: BLDR) is up about 53% year to date.
  • Lumber Liquidators (NYSE: LL) is up more than 19% year to date.
  • Orchard Supply Hardware Stores (NASDAQ: OSH) is up almost 17% year to date.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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