The home improvement industry is poised to thrive, fueled by increasing disposable income, swift urban development, a surging demand for personalization, and the incorporation of standout technologies. Lowe's Companies, Inc. (LOW), one key player in this market, recently released its fiscal second-quarter results, presenting a mix of positive and negative trends.

In this piece, I have discussed why it could be wise to wait for a better entry point in the stock.

Despite declining overall demand for home improvement, LOW managed to steady itself with sales from springtime projects. The company fell slightly short of projected sales yet surpassed Wall Street's earnings estimate.

Comparable store sales fell 1.6% due to dwindling demand for DIY home projects, a key revenue driver. But the decline was less severe than anticipated, buffered by increases in online spending and purchases from professional home contractors.

Approximately a quarter of LOW’s sales originate from home professionals, who are anticipated to have many projects in the pipeline. Such ongoing professional projects could boost sales of goods, including paint and plumbing equipment.

With a disciplined focus on its leading capital allocation program, LOW continues to generate long-term shareholder value. During the quarter, the company repurchased approximately 10.1 million shares for $2.2 billion and paid dividends of $624 million.

Moreover, LOW’s board of directors has declared a quarterly cash dividend of $1.10 per share, payable to the shareholders on November 8, 2023. It pays a $4.30 per share dividend annually, translating to a 1.95% yield on the current share price.

Its four-year average dividend yield is 1.62%. The company’s dividend payouts have grown at a CAGR of 24.5% over the past three years and 20% over the past five years. The company has paid dividends for 59 consecutive years.

LOW maintained its full-year forecast, projecting total sales between $87 billion and $89 billion, with a 2% to 4% decrease in comparable sales for the fiscal year and adjusted earnings per share between $13.20 and $13.60.

The stock has gained 13.3% year-to-date to close the last trading session at $255.74. However, over the past month, the stock declined 3.4%.

Here is what could influence LOW’s performance in the near term:

Mixed Financials

For the fiscal second quarter that ended August 4, 2023, LOW’s net sales declined 9.2% year-over-year to $24.96 billion, while its gross profit stood at $8.40 billion, down 8% from the prior-year quarter. Moreover, its net earnings and earnings per common share decreased 10.7% and 2.4% year-over-year to $2.67 billion and $4.56, respectively.

However, its cash and cash equivalents for the six months that ended August 4, 2023, stood at $3.49 billion, up 135.8% year-over-year. Also, as of August 4, 2023, LOW’s total current liabilities were $17.61 billion, compared to $20.37 billion as of July 29, 2022.

Mixed Valuation

In terms of its forward non-GAAP PEG, LOW is trading at 1.08x, 24.5% lower than the industry average of 1.44x. However, LOW’s EV/EBITDA and EV/EBIT of 12.18x and 14.24x are 27.1% and 5% higher than the industry averages of 9.58x and 13.55x, respectively.

Mixed Analyst Estimates

Analysts expect LOW’s revenue and EPS for the fiscal year ending January 2024 to decline 9.3% and 2.6% year-over-year to $88 billion and $13.38, respectively. For the quarter ending April 2024, its revenue and EPS are expected to come at $22.75 billion and $3.93, up 1.8% and 7.2% year-over-year, respectively.

POWR Ratings Reflect Uncertainty

LOW has an overall C rating, equating to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. LOW has a C grade for Stability, consistent with its 1.08 five-year beta.

Moreover, LOW’s Value grade of C is justified by its mixed valuation. Also, its C grade for Sentiment is in sync with the mixed analyst estimates.

LOW is ranked #25 out of 57 stocks in the Home Improvement & Goods industry.

Click here to access LOW’s POWR Ratings for Growth, Momentum, and Quality.

Bottom Line

The global home improvement market is gaining significant traction, driven primarily by increasing disposable income and urbanization sweeping across the globe. Additional impetus stems from evolving trends and a rising preference among younger consumers to remodel homes to align with their aesthetics and enhance their standard of living.

The global home improvement market is anticipated to reach $514.9 billion by 2028, growing at a CAGR of 6.40%.

However, given LOW’s mixed financials, valuation, and analyst estimates, it could be wise to wait for a better entry point in the stock.

How Does Lowe's Companies, Inc. (LOW) Stack Up Against Its Peers?

While LOW has an overall grade of A, equating to a Neutral rating, check out these other stocks within the Home Improvement & Goods industry: The Tile Shop Holdings, Inc. (TTSH), Flexsteel Industries, Inc. (FLXS), and Bassett Furniture Industries, Incorporated (BSET), with an A (Strong Buy) rating.

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LOW shares were trading at $225.54 per share on Wednesday morning, down $0.20 (-0.09%). Year-to-date, LOW has gained 14.89%, versus a 16.49% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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