Lowe's: What Investors Should Consider With Upcoming Earnings

Elevator Pitch

I rate Lowe's Companies, Inc.'s (NYSE:LOW) shares as a Hold.

With my prior August 12, 2022 write-up, my focus was on assessing the short-term financial outlook for Lowe's. I turn my attention to LOW's Q4 FY 2022 (YE January 31) earnings preview in this latest article.

My analysis of key items that investors should be considering such as remodelers' survey data and a key peer's quarterly financial performance leads me to the conclusion that in-line Q4 FY 2022 EPS is the most likely scenario for Lowe's. Furthermore, LOW's shares seem fairly valued according to the Price/Earnings-to-Growth or PEG valuation metric. Therefore, I continue to assign a Hold rating to Lowe's.

The Consensus Fourth Quarter Financial Forecasts For LOW

Earlier, Lowe's published a press release on February 22, 2023 disclosing that March 1 will be the date for the company's earnings announcement for the final quarter of the previous fiscal year.

The Wall Street analysts in general have a mixed view of LOW's upcoming quarterly financial results release. The majority of sell-side analysts covering the shares of Lowe's have kept their Q4 FY 2022 bottom line estimates for the company unchanged in recent times. Also, while the sell-side sees Lowe's reporting robust earnings growth for Q4 FY 2022, they expect the company to achieve relatively slower bottom line expansion as compared to prior quarters.

In the last three months, the analysts' consensus Q4 FY 2022 normalized earnings per share or EPS forecast for Lowe's has been lowered slightly by -1.4%. 10 and 3 of the sell-side analysts with LOW in their coverage universe have reduced and raised their fourth quarter bottom line projections, respectively in the past three months. But it is noteworthy that the other 21 analysts covering LOW's stock have chosen to maintain their respective Q4 FY 2022 normalized EPS estimates for the company during this same period. Also, 14 of the 34 sell-side analysts with an investment rating assigned to LOW are of the view that Lowe's stock is a Hold.

In specific terms, the sell-side is predicting that LOW's non-GAAP adjusted EPS will increase by +24.4% YoY from $1.78 in Q4 FY 2021 to $2.21 in the most recent quarter. On the surface, this seems like decent bottom line growth for Lowe's in the fourth quarter of fiscal 2022. But it is necessary to highlight that Lowe's delivered much faster normalized EPS growth of +41.5% and +33.8% in Q4 FY 2020 and Q4 FY 2021, respectively.

In-Line Q4 Financial Performance For Lowe's Is Highly Probable

I am of the view that LOW will report Q4 FY 2022 earnings that are aligned with the market's expectations in the current week.

A key indicator for Lowe's and other home improvement retailers is the NAHB (National Association of Home Builders)/Westlake Royal Remodeling Market Index which is referred to as "a quarterly survey of NAHB remodeler members" on NAHB's website.

The NAHB/Westlake Royal Remodeling Market Index decreased by -20% YoY from 83 in the final quarter of 2021 to 66 for the fourth quarter of 2022. But the NAHB/Westlake Royal Remodeling Market Index has still increased by +38% as compared to the first quarter of 2020 (index score of 48). This is consistent with the current Wall Street analysts' consensus Q4 FY 2022 bottom line financial estimates for LOW. The sell-side expects Lowe's to register decent EPS expansion for the fourth quarter, even though the pace of growth is slower as compared to previous quarters as per consensus financial figures outlined in the preceding section.

Separately, Home Depot (HD), a key rival and peer for LOW, met Wall Street's expectations with its recent Q4 FY 2022 (YE January) financial results released on February 21, 2023. HD's actual normalized EPS of $3.30 for the fourth quarter of fiscal 2022 came in marginally or +0.4% above the sell-side's consensus bottom line forecast of $3.29 per share.

At its most recent quarterly earnings call, Home Depot mentioned that it delivered good albeit slower "earnings growth driven by ticket while transactions steadily normalized back towards 2019 levels." Bottom line expansion at a more moderate pace, which is still solid, is likely how Lowe's would have performed in Q4 FY 2022 just like HD.

LOW's Shares Are Fairly Valued

Lowe's trades at 14.4 times consensus forward next twelve months' normalized P/E now as per valuation data sourced from S&P Capital IQ. In comparison, the market's consensus normalized FY 2023-2027 EPS CAGR for LOW is +13.6%.

This implies that LOW's current PEG multiple is 1.06 times. Given that a PEG ratio of 1 is deemed to be fair valuation, Lowes' is neither undervalued nor overvalued at current price levels based on the PEG metric.

Closing Thoughts For Lowe's

I don't see any good reasons to change my existing Hold rating for LOW after previewing LOW's upcoming Q4 FY 2022 financial results. The shares of Lowe's are at a fair valuations, and I don't think that there will be major positive or negative surprises when the company reveals its fourth quarter performance in the current week.

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