Lowe’s Companies, Inc. (NYSE: LOW) stock is down more than 2 percent this week after home improvement competitor Home Depot ( HD) reported a disappointing first-quarter earnings report. Analysts say Lowe’s investors are right to be concerned about Lowe’s first-quarter numbers expected on May 23, but patient investors will likely see a strong recovery in the second half of the year.
According to Morgan Stanley analyst Simeon Gutman, Lowe’s and Home Depot have performed better in the second half of the year in each of the past four years. He says that trend will likely continue in 2018.
[See: 7 of the Best Stocks to Buy for 2018.]
Bad weather in much of the country weighed on Home Depot’s business in the first quarter, and the company’s reported same-store sales growth of 4.2 percent was well short of consensus analyst estimates of 5.4 percent.
Gutman says 4.2 percent growth from Home Depot doesn’t bode well for Lowe’s, which has consistently underperformed Home Depot in sales growth in the past several years.
“We think market expectations for [Lowe’s Q1 same-store sales] were around zero to 1 percent … and with HD’s miss, they certainly moved lower,” Gutman says.
Morgan Stanley is now predicting Lowe’s same-store sales grew between -0.7 percent and 0.9 percent in the first quarter.
Morgan Stanley estimates Lowe’s has historically generated about 25 percent of its annual revenue in the first quarter compared to 17.5 percent for Home Depot. However, Lowe’s may have been more geographically insulated to the worst of the winter weather. Morgan Stanley estimates that just 35 percent of Lowe’s business comes from the northern markets that were severely impacted by weather compared to 40 percent exposure for Home Depot.
Most importantly for long-term investors, Gutman says after listening to what Home Depot management had to say on its earnings call, he’s convinced any first-quarter shortcomings will likely be made up later in the year.
“Nothing we heard on [Tuesday’s] conference call or during our callback with management leads us to believe there has been any degradation in core home improvement demand,” Gutman says.
[See: 10 Investing Themes to Remember for 2018.]
Gutman says rising interest rates and bloated earnings multiples will eventually limit the remaining upside for Home Depot and Lowe’s, but neither of these factors should hold the stocks back for at least the next year.
Morgan Stanley has an “overweight” rating and $115 price target for LOW stock.
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Lowe’s Companies, Inc. Earnings Preview: What to Expect From LOW Stock originally appeared on usnews.com
