We just saw that Lowe’s (NYSE:LOW) reported its results. What a mess this name has been the last few months, trading lower after our sell call back in May. Of course this is all in relation to the company we prefer you invest in, which is the Home Depot (NYSE:HD).

The company certainly has been transitioning, and Lowe’s is in the process of making a push for the professional market by making recent acquisitions, but so far, the name has persistently been soft on earnings reports. When Home Depot reported, it delivered solid earnings, and continues to be a serial guidance raiser. The same cannot be said of Lowe’s. After looking into the key metrics of both names over the years, we have repeatedly believed that HD was the blue you wanted to own. Lowe’s would be a buy if it continued to fall into the $60 handle range, and/or if it could demonstrate it was taking market share. Lowe’s however has struggled in most quarters, failing to meet expectations in many cases Lowe’s Q3 earnings bucked the trend. What happened?

Immediately you will notice that Lowe’s Q3 earnings delivered a top line and bottom line beat. This follows a top and bottom line miss in Q1 and Q2. Let us be clear. It wasn’t a stellar quarter, but it was positive. Revenue for the third quarter increased 6.5% year-over-year to $16.77 billion. This is certainly moving in the right direction but this increase is also less than we look for in a name at the present valuation, even after the pullback following our sell call in the summer. We also think it is key to point out that comparable sales increased 5.7%. This was a positive indicator, but even this good news was well below the comp growth that the Depot puts up. However, up 5.7% is above what we normally see for Lowe’s. Sales were helped by natural disasters. Sales of $200 million stemmed from the hurricane related damage, which bumped up Lowe’s Q3 earnings.

If you go back and look at recent results over the last 10-12 quarters you will see that earnings have also historically been an issue and this is where the company has continuously struggled. The bottom line is persistently soft. Here in Q3 Lowe’s beat the numbers. This quarter net earnings came in at $872 million. After making adjustments, earnings per share came in more than twice as high year-over-year at $1.05, up from $0.43 per share last year. This is also a beat of $0.02. That is strong, especially following a Q2 and Q1 where it whiffed on estimates. As far as the performance for Lowe’s Q3 earnings is concerned, Robert A. Niblock, chairman and chief executive officer and president of Lowe’s, stated:

“During the third quarter, we drove traffic in-store and online with compelling messaging and integrated customer experiences. We continue to invest in omni-channel capabilities to enhance value for customers and shareholders. I am also pleased with the progress we’ve made to enhance our product and service offering for the Pro customer, delivering another quarter of comparable sales above the company average. 

I am incredibly proud of our team’s unwavering commitment to serving customers and their communities every day.  This commitment was especially evident this quarter, as our employees mounted the largest natural disaster response in our history. Our merchant, vendor, logistics, and store teams worked together seamlessly to ensure customers had the right products to protect and repair their homes, and we remain committed to helping impacted communities rebuild in the months ahead,”

Our take

Shares are dropping a bit on Lowe’s Q3 earnings. Home Depot is clearly still the winner in market share. Foot traffic and rising comp sales were a big plus this quarter so we won’t discount that. Still, the company leaves doubts in the Streets mind. We feel shares have rallied enough and you should wait until the $60 range to consider buying given the valuation. The bottom line here is that home ownership and improvement isn’t going anywhere, and while Home Depot reigns supreme, Lowe’s still gets it piece of the pie. We will repeat once again that the key is for Lowe’s to figure out how to get more of the pie. Lowe’s has simply been struggling to fight for more of the pie.

Looking Ahead

Looking ahead, the longer-term appears bright. The economy is stronger than it has been in a decade. The outlook for housing is strong. Sales are expected to increase 5% for Lowe’s in 2017, while earnings will grow to $4.20 to $4.30, but we believe Lowe’s will come in at the lower end of these estimates. We still think the stock is overvalued here. In the mean time, if you are holding, management is trying to build value. The company repurchased $1.25 billion of stock under its share repurchase program. It also paid $299 million in dividends in the second quarter. While that is a plus, there is just not enough reason to buy here. This is especially true when you can easily buy Home Depot.


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