It’s no secret that the housing market has been less than stellar, mainly due to high mortgage rates and persistently high inflation. Home improvement companies have also felt the pinch as customers defer taking on pricey home projects until their wallets feel fatter.
LOW had appeared to be on the rebound this year until September, when sales concerns triggered investors to dump shares. The stock’s year-to-date gains at the time have now been entirely erased, and the share price has dipped into the red for the year.
The decline in DIY spending caused the company to lower its guidance for the year, which is another reason the stock has fallen. But in spite of the sales decline, Lowe’s was able to make strides in its professional sales segment. It also launched new discount stores geared towards customers on a budget.
And while further headwinds in the housing and home improvement markets are expected, next year may paint a different picture. Add to the mix the fact that LOW has been a reliable dividend stock handsomely rewarding investors for years and perhaps there is hope. So will Lowe’s stock recover?
Why Did Lowe’s Stock Go Down?
Revenue was down 12.8% in the 3rd quarter of 2023 compared to the same quarter of last year.
Residential DIY-ers account for 75% of the company’s business, and Lowe’s saw an unforeseen drop in big-ticket purchases in the quarter. Sales of $20.4 billion were lower than the $20.89 billion analysts had forecast.
While Lowe’s hopes to get a boost from holiday spending (the company sells Christmas decorations as well) it won’t be enough to get 2023 returns back on track. Indeed, Lowe’s reduced its guidance for the year from $87 to $89 billion down to $86 billion.
Alone the guidance markdown would be enough to drive LOW share price down, but there are other pain points. For example, online sales dropped 4%.
Adding to the woes, Lowe’s customers have cut appliance spending and given the company is the leading appliance seller in America, a segment that drives 14% of its revenue, that fall has been particularly impactful.
Lowe’s adjusted down its guidance for earnings per share too, and now expects EPS of $13 per share for the year as opposed to earlier guidance for $13.20 to $13.60 per share. EPS for the 3rd quarter was nearly even with expectations.
Will Lowe’s Stock Recover?
According to analysts, Lowe’s stock should recover back to fair value of $225, representing 12% upside.
It must be emphasized, however, that the company’s woes are tied to macroeconomic headwinds, and continued inflation worries are likely to act as a drag.
On a more positive note, upbeat sentiment was affirmed by Home Depot’s leadership in their 3rd quarter earnings call, when they said that we may be nearing the end of inflationary issues.
Even if that’s true, it will take time for Lowe’s to get back to business as usual. And it may concern some Lowe’s investors that rival Home Depot’s revenue was higher than expected for the quarter, news that drove that company’s stock up.
That could also be a positive sign for LOW, as it shows that investors are ready to buy back into home improvement stocks if the economy appears to be turning around.
Another good sign for Lowe’s is that it has been able to leverage customers’ demands for lower cost items. The company opened 3 outlet stores across the US In the 3rd quarter alone, bringing the total number of discount stores to 14.
These new locations sell used, discontinued, or slightly damaged versions of Lowe’s staples like appliances, grills, and outdoor furniture. Together with the company’s growing contractor sales base, Lowe’s hopes that they will help offset some of the sales declines.
What Do Analysts Say About Lowe’s Stock?
In spite of concerns about lingering inflation, the analysts are largely still in the company’s corner. Out of 36 analysts who have provided opinions on the stock, 18 rate LOW as a Buy while 3 assess Lowe’s shares will outperform the market over the coming year.
The highest forecast sees the stock topping at $290 per share over the next year, which represent an over 45% improvement from where LOW currently trades. The general consensus is the stock will hit $224 in the next 12 months, a 12.5% increase.
The bulk of the remaining analysts (16 out of 36) still consider the stock a Hold but there are two Sell ratings and the lowest forecast for the stock projects a decline of 17% to $165 per share over the next 52 weeks.
Is Lowe’s Stock on Sale?
Analysts generally agree that LOW is due to bounce back next year. The company’s Price-To-Earnings (P/E) ratio of 15.4x may make the stock appear to be priced a bit high at this valuation. But in comparison to Home Depot’s P/E ratio, which is slightly below 20, it could still indicate that LOW is undervalued.
Another selling point for LOW is its dividend, and the company currently pays a 2.2% annual dividend yield. That amounts to a quarterly payout of $1.10 per share. Notably, the dividend has been stable over the course of the year, and Lowe’s has continued to raise it since the 1990s.
Is Lowe’s Stock a Buy or Sell?
Lowe’s is a firmly established home improvement leader that’s had a hard year due to factors that are largely outside of its control. If those factors start to ease up, the stock could certainly bounce back. After all, Lowe’s shares were was trading at over $237 per share just a few months ago.
The company has continued to drive its pro sales and outlet stores as ways to mitigate declining sales. And it continues to pay out a solid and consistent dividend.
All in all, long-term investors should consider LOW on a further pullback contingent on economic trends.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.