Key points
- Lowe’s had a solid quarter despite year-over-year declines, and shares are up.
- Cash flow and capital returns are central to the story; guidelines may be conservative given the operating environment.
- Analysts put upward pressure on the stock price; some of the most recent targets imply new all-time highs.
- 5 Stocks We Prefer Over Lowe’s Companies
At face value, Lowe’s Companies NYSE: LOW had a rough fourth quarter compared to competitor Home Depot, but details in the report belie that assessment. Comps were weak, but the company is building leverage, generating cash and returning capital to investors in a meaningful way.
The combination of leverage, cash flow and capital returns has supported the shares in 2023 and will boost them in 2024 because the company is approaching an inflection point. Demand for professional and DIY materials is weak but a recovery is expected in the second half of the year. The only question is when the Fed will make its first interest rate cut; until then, sufficient business volume is expected to keep capital returns flowing.
Lowe’s had a good quarter despite year-over-year declines
Lowe’s reported net revenue of $18.68 billion, down 17% year-over-year. This is much worse than the 3% decline recorded by Home depot New York Stock Exchange: HD, but it’s better than expected and includes some unique pieces that make the conversion to HD meaningless.
Factors impacting profits include an extra week compared to the previous year and the loss associated with the sale. Adding them back into the mix, Lowe’s revenue fell by low single digits, aligning more closely with HD. On a comp basis, sales fell 6.2% year over year due to bad weather in January and a slowdown in DIY. The pro-business sector, which also included Home Depot, was flat.
The news on margins is good. Lowe’s is strengthening its leverage by controlling costs despite slowing sales and reducing fixed costs. Gross margin increased by less than 50 basis points, but was compounded by the reduction in SG&A, leaving operating margin up nearly 150 basis points. GAAP and adjusted earnings are down year-over-year, but adjusted earnings are $0.10 better than forecast, outpacing revenue strength by more than 400 basis points.
The handling is a little weak but probably cautious given the operating environment. The company expects 2024 revenue to range between $84 billion and $85 billion, down 2.3% year-over-year and below consensus by 1.0%, with earnings expected in a comparable range. The bottom line is that low-end earnings of $12.00 are sufficient to maintain a solid capital return outlook.
Capital returns in 2023 topped $8.9 billion, including the 1.9% dividend and share repurchases. The dividend is expected to increase by a mid-to-high single-digit amount, but share repurchases may slow; buybacks reduced the share count by 5% in 2023 and are expected to reduce the count by low to mid-single digits in 2024.
Analysts put upward pressure on Lowe’s stock price
For this reason, Dividend King analysts’ sentiment has slipped to Hold from Moderate Buy, but the price target continues to rise. The price target has increased 6% over the past year, including numerous regions in January and February, leading the market, and upward revisions could continue this year. Among the most recent is a double upgrade from JPMorgan Chase to Neutral to Overweight with a price target of $265, a new all-time high.
Price action is favorable. Lowe’s stock market rose 2% after the release and is trading at what would be a new closing high. Assuming the market can continue to rise, a move towards new multi-year highs would open the door to $260. The $260 level represents critical resistance and could limit gains until the end of the year. Potential catalysts for higher prices will be first quarter results, updated guidance, real estate data and the Fed. When the Fed indicates that the first cut is imminent, this and other real estate stocks should see their markets advance strongly.
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