Can Lowe’s Improve Your Portfolio?

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As of May 2, Lowe’s Cos. Inc. (NYSE:LOW) operated 1,836 home improvement and hardware stores in the United States, Canada, and Mexico, representing 200.7 million square feet of retail selling space. Much like its major competitor Home Depot (NYSE:HD), Lowe’s business depends heavily on activity in the housing sector, which has been lukewarm of late. However, Lowe’s seems to have weathered the storm quite well, as evidenced by the company’s recent quarterly performance.

Lowe’s reported net earnings of $624 million for the quarter ended May 2, a 15.6 percent increase over the same period a year ago. That is an incredible year-over-year improvement. What’s more, diluted earnings per share increased 24.5 percent to 61 cents from 49 cents in the first quarter of 2013. The report could have been stronger but was weighed by charges related to long-lived asset impairments, which reduced pretax earnings for the first quarter by $23 million and diluted earnings per share by 1 cent.

Also included in the above reported results is the impact of a lower tax rate in the first quarter. The lower tax rate, primarily the result of a settlement of prior year tax matters, contributed 4 cents to diluted earnings per share. Sales for the first quarter increased 2.4 percent to $13.4 billion from $13.1 billion in the first quarter of 2013, and comparable sales increased 0.9 percent. Delivering on the commitment to return excess cash to shareholders, the company repurchased $850 million of stock under its share repurchase program and paid $186 million in dividends in the first quarter.

Robert A. Niblock, Lowe’s chairman, president, and CEO, said: “We executed well during the quarter, despite an unexpectedly prolonged winter in many areas of the country. While poor weather dampened traffic and negatively impacted performance of exterior categories, results for indoor categories were solid. We effectively aligned inventory, staffing and marketing resources by climatic zone to best serve customers’ needs.”

Looking ahead, Lowe’s is expected to do well in comparison to 2013. For the remainder of 2014, total sales are expected to increase approximately 5 percent. Further, comparable sales are expected to increase approximately 4 percent. Lowe’s plans to expand modestly. The company expects to open approximately 10 home improvement and five hardware stores. What will drive the stock in the coming months is expected earnings. Earnings before interest and taxes as a percentage of sales are expected to increase approximately 65 basis points, and these earnings will be subject to an effective income tax rate of approximately 37.2 percent.

The company raised its diluted earnings per share outlook for the year as a result of the lower tax rate, primarily the result of a settlement of prior year tax matters, offset by charges related to long-lived asset impairments in the first quarter. Lowe’s now expects a higher diluted earnings per share of approximately $2.63 for the fiscal year ending January 30, 2015.

In summation, Lowe’s had a great quarter, stronger than Home Depot’s by comparison. Lowe’s is growing slowly and is managing its operations well. It managed to deliver a solid quarter despite the late start of spring this year. With its improved guidance, I am bullish on the stock.

Disclosure: Christopher F. Davis holds no position in any stock mentioned. He has no plans of initiating a position in any names in the next 72 hours. He has a Buy rating on the stock and $54 price target.

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