Q2 earnings were better than the Street expected.
Lowe’s (NYSE:LOW) stock was moving higher on Wednesday, up about 2% shortly after the opening bell following the release of its second quarter earnings.
The home improvement retailer had solid results, beating analysts’ estimates. It also got a boost from an acquisition it made.
After a rough start to the year, Lowe’s stock has been surging in recent weeks. It has jumped about 18% over the past month and is now up about 5% year-to-date at $258 per share.
Improving summer sales have been one of the catalysts, and that showed in the second quarter earnings report. Lowe’s generated revenue of $24.0 billion, up about 2% year-over-year and in line with estimates. Comparable sales for the quarter increased 1.1%.
Net earnings were $2.4 billion, up about 1% year-over-year, while earnings rose roughly 2.3% to $4.27 per share. Adjusted earnings, eliminating acquisition and other one-time costs, were $4.33 per share, up about 6% from the same quarter a year ago.
“This quarter, the company delivered positive comp sales driven by solid performance in both Pro and DIY. Despite challenging weather early in the quarter, our teams drove both sales growth and improved profitability,” said Marvin Ellison, Lowe’s chairman, president and CEO.
Acquisition to bolster pro sales
The big news in the quarter was the acquisition of Foundation Building Materials (FBM), a leading North American distributor of interior building products, including drywall, metal framing, ceiling systems, commercial doors and hardware, insulation and other similar products. The company serves large residential and commercial professionals in both new construction as well as repairs and remodels.
This $8.8 billion deal follows, and complements, Lowe’s recent purchase of Artisan Design Group, a provider of design, distribution and installation services for interior surface finishes to home builders and property managers.
Both FBM and Artisan seek to bolster Lowe’s Pro side of the house, which caters to building professionals, as opposed to do-it-yourselfers.
Lowe’s has seen steady growth in its pro business, and wants to lean into that as DIYers remain hesitant on repairs and remodels in this economic environment. The professional builders segment is seen as potentially a higher growth area, should the housing market turn around. Potentially lower interest rates and new housing from pent-up demand could lead to rapid growth, and Lowe’s wants to be ready for it.
“In fact, industry analysts estimate that there’s roughly $50 billion of deferred project demand as many homeowners have delayed larger discretionary projects over the past few years,” Ellison said on the earnings call. “At the same time, an estimated 18 million new homes are needed by 2033. Together, these trends point to a healthy pipeline of demand for home improvement and new home construction ahead. That’s why we’re confident that our most recent investments and acquisitions will uniquely position us to accelerate sales growth when the market turns.”
FBM is considered a leader in its space, with a network of 370 locations in the US and Canada, serving 40,000 customers. The company generated approximately $6.5 billion in revenue and $635 million in adjusted EBITDAin 2024 and averaged 25% compound annual revenue growth and 30% annual adjusted EBITDA growth from 2019 to 2024.
Mixed guidance
Lowe’s boosted its sales projections for the rest of the year to a range of $84.5 to $85.5 billion, up from the previous range of $83.5 to $84.5 billion. Further, comparable sales are expected to be flat to up 1% this year.
However, it lowered its earnings guidance to $12.10 to $12.35 per share from the previous range of $12.15 to $12.40 per share. The operating margin range was also lowered to 12.1% to 12.2%, down from 12.3% to 12.4%. The reductions in part reflect the costs of the acquisitions. However, both the adjusted earnings and operating margin guidance stayed the same.
Analysts were mixed on the stock, as Stifel raised the price target by $25 per share to $265, but Evercore and Citigroup were less bullish.
Investors might want to consider Lowe’s stock, as it has been a stellar long-term, performer and will eventually see tailwinds when the housing market improves and rates come down.
It is just a matter of when and getting in at the right valuation. Like Target, which also released earnings on Wednesday, it is a fantastic, reliable dividend stock. It has raised its annual dividend for 54 straight years, making it a rare Dividend King.
