Lowe's Strong Q3 Builds Excitement For The Coming Quarters

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Lowe's Companies, Inc. LOW reported forecast-beating top- and bottom-line results for its fiscal third quarter before the open Tuesday.

Comps growth accelerated from 4.5 percent in the previous quarter to 5.7 percent. 

The company, however, left its full year guidance unchanged even as peer Home Depot Inc HD raised its earnings outlook.

The Analyst

Citing Lowe's positioning to drive improved execution in the quarters ahead and a positive outlook on the sector and valuation, KeyBanc Capital Markets analyst Bradley Thomas reiterated an Overweight rating and $98 price target for the shares.

The Thesis

The bottom-line outperformance of the home improvement retailer was due to better-than-expected sales and SG&A leverage, Thomas said in a Tuesday note. (See Thomas' track record here.) 

Hurricanes benefited Lowe's top-line, and the underlying comp remained strong and accelerated on a two- and three-year stacked basis, the analyst said.

The comps growth, which was the 18th straight quarter of positive comps for Lowe's, was aided by an increase in average ticket and transaction count, according to KeyBanc. Hurricanes contributed 140 basis points to comps, suggesting underlying trends were also solid, the analyst said. 

The gross margin contraction tied to the hurricane season was offset by SG&A leverage, Thomas said. 

The non-GAAP earnings per share for fiscal year implied by Lowe's GAAP earnings per share guidance was roughly in line with the consensus. The analyst also noted management's comments that quarter-to-date trends in the key holiday quarter were running ahead of plans.

"We believe shares are compelling given the fundamental growth opportunity for the Company, and expect LOW shares would warrant multiple expansion if execution improves and comps accelerate."

The Price Action

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Lowe's shares retreated by 1.07 percent to $80.59 Tuesday in reaction to the results, and are up slightly in mid-morning trading Wednesday.

The shares are up about 14 percent year-to-date.

Related Links:

Why One Analyst Would Prefer To Build A Position In Lowe's Rather Than Home Depot

Lightning Round: Jim Cramer Gives His Opinion On Lowe's

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Posted In: Analyst ColorPrice TargetReiterationAnalyst RatingsBradley ThomasKeyBanc Capital Markets
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