On Wednesday, Evercore ISI adjusted its price target for Lowe's Companies Inc. (NYSE: NYSE:LOW), reducing it to $250 from the previous target of $255, while maintaining an "In Line" rating for the home improvement retailer. The firm's assessment reflects the challenges Lowe's faces as it tries to balance cost management with growth investments in a bid to increase market share without further eroding margins.
The analyst noted that Lowe's has experienced twelve quarters of negative traffic and six quarters of negative comparable store sales (comps), raising concerns about the company's ability to maintain profitability. Although Lowe's reported a first-quarter earnings beat, its guidance for 2024 remains unchanged at a midpoint of $12.15 per share, indicating that the company does not anticipate a quick recovery in comps or margins.
Despite these challenges, Lowe's has managed to control its margins, with expectations of only a 100 basis point decrease from 2022, despite a cumulative 7% drop in comps. This is seen as a well-controlled effort but could become more difficult to sustain if negative comps continue.
The report recognized differing perspectives among investors, with some focusing on declining gross margins and a slow start to second-quarter sales, while others may find encouragement in sequential improvements.
Evercore slightly raised its 2024 earnings estimate for Lowe's from $12.15 to $12.20, factoring in the recent earnings beat. The revised price target of $250 is based on an anticipated market multiple applied to recovering earnings in 2025, which are estimated to reach $13.40 per share. The firm suggests that Lowe's could become more attractive to investors once a broader recovery in the home improvement sector becomes evident.
The analysis also compares Lowe's to other companies, suggesting that there are potentially better risk/reward opportunities in stocks like Sherwin-Williams (NYSE:SHW), Home Depot (NYSE:HD), Wayfair (NYSE:W), or Tractor Supply Company (NASDAQ:TSCO), which are either part of Evercore's Top Five Portfolio or hold an "Outperform" rating.
Moreover, while the Home Improvement Leading Indicator (HILI) is showing signs of improvement, predicting flat comps in the second half of the year, there is caution due to a survey indicating continued softness in big-ticket spending. Evercore will continue to monitor web traffic trends for any significant changes.
InvestingPro Insights
Lowe's Companies Inc. (NYSE: LOW) has demonstrated a commitment to shareholder returns, as evidenced by its impressive track record of raising dividends for 40 consecutive years, and maintaining dividend payments for 54 years. This resilience in rewarding investors is a positive signal, especially in the context of the challenges highlighted by Evercore ISI. Moreover, the company's stock exhibits low price volatility, which may appeal to investors seeking stability in their portfolios.
InvestingPro data shows a market capitalization of $128.66 billion, and a P/E ratio standing at 18.37, which is considered low relative to near-term earnings growth. The PEG ratio, which measures the stock's valuation while taking into account earnings growth, is at 0.56—a figure that suggests the stock may be undervalued based on its growth prospects. Additionally, Lowe's has a strong return on assets of 15.82% for the last twelve months as of Q1 2023, underscoring its efficiency in utilizing its asset base to generate profits.
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