The profitability equation is perhaps the simplest business metric there is: profit equals revenue minus expenses. Businesses all over live and die by this metric, and for Lowe's (NYSE:LOW), it hit the company hard in pre-market trading. Lowe's lost a little over 6.5% of its value in overnight trading, but don't let that scare you off. Lowe's is still an excellent buy, so treat this brief loss as an opportunity to get in.
Measure Twice, Cut Six Percent Off
Admittedly, the news was not as good as an “excellent buy” would suggest. The company posted earnings of $1.98 per share, which is only slightly short of the $1.99 per share expected by a Refinitiv consensus. Revenue, however, delivered in a big way, as the company brought in $22.31 billion against the expected figure of $21.15 billion in that same consensus.
Net income, meanwhile, slipped substantially, going from $1.05 billion this time last year to $692 million this year. Sales figures are in the exact opposite position, with revenue from this time last year coming in at $17.39 billion against this quarter's $22.31 billion. Same-store sales are up spectacularly, coming in at 30.1% against expected figures of 22.8%. All merchandising departments saw sales increase at least 15%, with several departments turning in figures much better than that.
Expenses, however, hit the company particularly hard. The necessary responses required to keep brick-and-mortar retailers open in the age of COVID-19 delivered a blow to revenue, as the company put in $245 million in “COVID-related support for frontline employees” just in the third quarter. So far, these additional costs represent over $1.1 billion spent, the company noted.
A Rising Tide Lifts All Home Improvement Boats
The future, meanwhile, looks fairly upbeat. Lowe's is expecting to bring in between $1.10 and $1.20 a share with the fiscal fourth quarter, and for same-store sales to increase between 15% and 20%. That's in line with estimates, if just barely, as the consensus is looking for Lowe's to hit the high side of that estimate at $1.17.
Interestingly, Lowe's figures come in just after Home Depot (NYSE:HD) released its figures, which delivered an estimate-beating win of its own. Sales were up 24% from the same time last year, illustrating what seems to be a growing consensus: people are stuck at home for one reason or another, and as such, they're going to make their homes a much nicer place to spend a whole lot of time. That, in turn, is driving big gains in the home improvement sector. Throw in the notion that housing starts are actually above expectations—1.53 million in October against 1.46 million expected—and there's clear opportunity afoot.
Where Do We Go From Here?
The analyst community, meanwhile, based on our latest research is all in favor of picking up more Lowe's shares. The company is currently rated a “buy” on the strength of five “hold” ratings and 26 “buy” ratings. That consensus has slipped a bit over the last few months—just three months ago, it was two “hold” and 30 “buy”—but the average price target has gained substantially in that same time, going from $161.48 to $169.73.
Yet there are signs that investors are beginning to wonder, what's next? Housing starts can only gain for so long, after all, and there are only so many modifications one can make to a currently-existing home before it stops being a home and instead becomes some kind of vehicle. These points are valid; the COVID-19 complications can't last forever, especially not with multiple vaccine candidates in play from companies ranging from Pfizer (NYSE:PFE) to Moderna (NASDAQ:MRNA) and beyond. It's worth considering what happens when people are no longer required to spend all their time at home and can actually return to leaving the house again.
Here, however, is where Lowe's has an opportunity to shine. There will always be a need for home improvement as long as people have homes. Sure, the massive gains we've seen so far aren't sustainable, but with Lowe's focusing on stock buybacks and dividend improvements, as reports note, there's every reason to buy in. Throw in the fact that Lowe's is trading much less expensively than Home Depot--$151.59 for Lowe's against $274.34 for Home Depot as of this writing—and you've got a bargain way to make a home improvement play. Home improvement plays are likely to do well for the next few months at least.
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