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Lowe's is a Great Momentum Stock: Should You Buy?

The demand for home furnishings products for new homes or to transform existing living spaces into home offices has surged dramatically since the onset of the COVID-19 pandemic last year. As a result, shares of home improvement retailer Lowe’s Companies (LOW) have gained nearly 39% over the past year. Read ahead to learn whether LOW can maintain its momentum as the world retreats to the ‘old normal’ this year.

The Covid-19 pandemic has kept many people sequestered in their homes over the last year, during which time many devoted time and attention to home improvement.  People have been modifying their existing living spaces into home offices to facilitate working from home more comfortably. In addition, the current low mortgage rate environment is motivating people to buy new homes. These factors have buoyed  home improvement retailers like Lowe’s Companies, Inc. (LOW), which has witnessed unprecedented demand for its products.

LOW is one of most prominent home improvement retailers operating in the United States and Canada. It  serves approximately 18 million customers per week.

Acknowledging LOW’s ability to meet continued broad-based demand, investors have snapped up its stock. The stock has gained 38.8% over the past year versus the S&P 500’s 16.4% returns.

Let’s take a closer look at the factors that could influence LOW’s performance in the near term:

Enhanced Customer Engagement

On December 9, 2020, LOW unveiled a new fundamental retail strategy dubbed  “Total Home” strategy. The company plans to offer everything a homeowner needs, providing a total home solution. This includes all products and services needed to repair and improve a home for do-it-yourself (DIY) and Pro customers across all décor categories, including paint. The strategy aims to enhance customer engagement and grow market share by intensifying the company's  focus on  professional customers, expanding its  online business, modernizing installation services, improving localization efforts, and elevating its  product assortment.

Robust Financials

LOW’s revenue and EPS have grown at a CAGR of 7.4% and 19.4%, respectively, over the past three  years. In the fiscal third quarter ended October 2020, the company generated net sales of $22.3 billion, increasing 28% year-over-year. While online sales surged 106%, comparable sales for the U.S. home improvement business increased 30.4% year-over-year. In addition,  LOW delivered more than 15% growth in all merchandising departments and more than  20% growth across all geographic regions. Its adjusted EPS came in at $1.98, rising 40.4% compared to the year-ago value of $1.41.

Post-Pandemic Growth

Consumers across the globe have been investing in better equipping  their homes for work-from-home, remote schooling and entertainment needs. Moreover,  DIY projects in remodeling, decorating and maintenance of furniture and fixtures are being  undertaken widely amid the nationwide shutdown. Now, as most organizations are permanently shifting to an online presence, the demand for home improvement tools for fixing and repair work to further ease remote working should remain robust.

Strong Analyst Outlook

Analysts expect LOW’s revenue to increase 20.1% in the current quarter (ending January 31, 2021), 17.4% in the next quarter, and 31.3% in the current year. The company’s EPS is expected to grow 26.6% in the current quarter, 51.7% in the current year and 7.2% next year. Moreover, its EPS is expected to grow at a rate of 24.2% per annum over the next five years.

POWR Ratings Indicate Robust Prospects 

LOW has an overall rating of B, which equates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.

Our proprietary rating system also evaluates each stock based on eight different categories. Among these  categories, LOW has a Momentum Grade of A, consistent with its market beating returns over the past year.

LOW has a B grade for  Growth, indicating its ability to grow its financials at a faster pace versus its peers. Of the 64 stocks in the A-rated Home Improvement & Goods industry, LOW is ranked #16.

Beyond what I stated above, we also have given LOW grades for Value, Stability, Sentiment, and Quality. Get all the LOW ratings here.

Bottom Line

LOW has garnered solid momentum over the past few months because people working from home turned to home improvement projects amid the pandemic to facilitate the “new normal” way of living. However, as most pandemic-driven challenges and trends are expected to continue this year, we think LOW should continue to outperform the broader market. Additionally, we believe LOW's cost-cutting program and big investments in omnichannel (bricks and clicks) are likely to drive similar growth in the near future.

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LOW shares were trading at $176.60 per share on Wednesday afternoon, up $2.54 (+1.46%). Year-to-date, LOW has gained 10.41%, versus a 4.79% rise in the benchmark S&P 500 index during the same period.



About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.

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