Lowe's shares rise as housing market rebounds
The home-improvement retailer seems to emerging from Home Depot's shadow.
Shares of Lowe's (LOW) closed up more than 6% Monday as the second-largest home improvement retailer posted better-than-expected quarterly earnings. This provides further evidence as to how the rebounding housing market is stimulating the economy. But the Mooresville, N.C., company, which has long lagged rival Home Depot (HD), hasn't turned the corner quite yet.
Net income at Lowe's surged 76% to $396 million, or 35 cents a share, versus $225 million, or 18 cents, a year ago, according to the company's earnings press release. Sales rose 1.9% to $12.1 billion. Excluding one-time items, profit was 40 cents, beating Wall Street's consensus forecasts by a nickel. The sales results exceed the $11.91 billion analysts' had expected. Comparable sales, a key retail metric measuring activity at stores opened at least a year, rose 1.8%.
Under CEO Robert Niblock, Lowe's has cut jobs, reduced store openings and streamlined its supply chain to compete more effectively against Home Depot, which has posted better comparable sales than it for 14 straight quarters, according to Reuters. The company's efforts are starting to pay off. Lowe's reported that gross margins rose to $4.14 billion, while selling, general and administrative expenses fell to $3.02 billion.
The gap between Lowe's and Home Depot is starting to narrow, though the smaller company's results are expected to be lackluster for some time to come. Lowe's, however, raised its full-year earnings forecast. Sales are expected to be flat during the current fiscal year, matching expectations. Earnings are expected to be $1.64, lagging forecasts that called for $1.66.
Though I argued recently that "the rewards associated with Lowe's outweigh the risks," today's price action has caused me to change my mind. Lowe's is expensive now, trading at a price-to-earnings ratio of 21.18, a five-year high. Home Depot isn't cheap either, with a multiple of about 22. Lowe's also is trading above its average 52-week price target of $33. Analysts expect Home Depot to hit $67.68, about 7% above where it currently trades.
The good news seems to be factored into both stocks, which should be avoided until there is a significant pullback. Given a choice, I would buy Lowe's since it probably has more upside potential than Home Depot, which many investors consider to be the better managed of the two.
Looking for an alternative retail play? Consider Wal-Mart (WMT). The world's largest retailer is cheaper than either Lowe's or Home Depot, trading at a multiple of 13, near a historic low. Wall Street expects the Bentonville, Ark., company to jumpstart its sluggish growth and to address allegations of bribery in some of its overseas businesses. Wal-Mart shares are expected to hit $80 in the next 52 weeks, about 17% above where they currently trade. The company also pays a dividend that yields 2.3%, beating the 2% paid by Lowe's and the 1.9% paid by Home Depot.
Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
[BRIEFING.COM] The major averages remain mixed with the Dow (+0.2%) holding a modest gain while the Nasdaq (-0.5%) and S&P 500 (-0.1%) continues trading in the red.
Biotechnology continues to be a drag on the Nasdaq, but the iShares Nasdaq Biotechnology ETF (IBB 257.64, -3.50) has climbed off its lows and now holds a loss of 1.3%. The health care sector (-0.4%), meanwhile, remains not far from its session low.
On the upside, energy (+0.3%), financials (+0.5%), and ... More
More Market News
Intel's shareholders are excited that Intel will ship four times more tablet microprocessors than last year because it may mean a higher dividend is coming.
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'