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Stock Analyst Update

Also-Ran Lowe's Looks Undervalued

While this marks another quarter in which Lowe's business lagged that of Home Depot, the performance was still solid.


While third-quarter sales results at wide-moat  Lowe's (LOW) beat our implied outlook, with comparable-store growth of 5.7% versus our 3.8% estimate, the company was helped by $200 million in revenue and 1.4% in comps from hurricane-related sales. Given that Lowe's is maintaining its full-year outlook for 3.5% comp store and 5% revenue increases, in line with our prior forecast, which included comp store and revenue growth of 3.4% and 5.1%, respectively, we don’t anticipate any material change to our $93 fair value estimate. This does imply a decent slowdown in the company’s fourth quarter (lapping a 53-week year in 2016 as well as a sales bump from Hurricane Matthew and Louisiana flooding), with comps around 2.5% and revenue that declines, although we believe these numbers could be a tad light as hurricane-related sales linger into the final quarter. The shares are trading at 13 times our tax-adjusted 2018 earnings per share estimate, and we think the company has the ability to deliver midteens EPS growth over the next five years, rendering the stock slightly undervalued.

While this marks another quarter in which Lowe's business was not quite as robust as that of peer Home Depot (which put up comps of nearly 8%), the performance was still solid for a mature business that has room for positive sales growth in the brick-and-mortar space. We expect housing starts to rise from an estimated 1.22 million in 2017 to 1.55 million in 2019, bringing further demand for home-improvement projects as consumers move into these new locations and leave their current residences. Sustained turnover, still-low interest rates, and generally positive economic support (employment, home prices, confidence) should offer continued demand in the category over the next few years, supporting retailers like Home Depot and Lowe’s.

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Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.