Courtesy of Benzinga.
Maybe Bill Ackman really does know what he’s talking about.
Lowe’s (NYSE: LOW) reported third quarter earnings this morning that beat Wall Street estimates, and shares are responding in kind, gaining more than 2% as of the time of this article.
The Mooresville, NC-based company reported earnings of 35 cents per share on $11.85 billion in revenues. Wall Street was looking for earnings of 33 cents per share on $11.70 billion in revenues. The company also said that it expects 2011 sales to be helped by an extra week, which should help sales rise 1.5%. It expects fourth quarter same-store-sales to be flat to up 1%, compared to a 0.7% rise in the third quarter.
“Our performance is not at the level we expect relative to the market,” commented Robert A. Niblock, Lowe’s chairman, president and CEO. “We are making the changes necessary to right size the organization, improve speed to market and enhance the shopping experience. We are keenly focused on improving our core business while also developing new capabilities and services for the future. I am confident we are moving forward on a clear path that is not dependent on an unlikely near-term economic recovery.”
Ackman announced his stake in Lowe’s at the Great Investors’ Best Ideas event in Dallas last week, and said the shares are undervalued by anywhere between 30% and 100%, based on several metrics.
The Pershing Square hedge fund investment guru said he believes that Lowe’s will eventually start to trade more in line with Home Depot (NYSE: HD), as the company improves EBIT margins, and aggressively buys back stock. This could take a while to happen though, something that was not lost on Oppenheimer in its research note this morning.
Oppenheimer wrote, “Comp sales of +0.7% topped plan and imply a trend similar to that of Q2 (Jul.). Better top line growth, however, seemingly came at the expense of margin (gross margin down 90 bps). We are encouraged with the more aggressive steps that LOW has undertaken lately to better position its chain in an increasingly mature home improvement sector. Progress at LOW is likely to prove slow.”
The company is in the process of shutting down under-performing stores, and trying to use its strong balance sheet to boost its share price. The company has been aggressive in returning capital to shareholders, through buybacks and dividends. Shareholders are starting to take notice, as shares are up over 20% in the past three months, although down 6% year to date.
As the company improves its metrics and continues to aggressively buy back stock, the shares do look undervalued here, and could move higher based on financial engineering. If there is a housing recovery and the company is able to regain some of the market share, “higher Lowe’s” could definitely be in the future.
ACTION ITEMS:
Bullish:
Traders who believe that Lowe’s is cheap here like Ackman believes might want to consider the following trades:
- Shares are cheap trading at 13 times expected 2012 earnings. Traders may want to initiate positions in Lowe’s.
Bearish:
Traders who believe that the housing recovery does not happen and Lowe’s is unable deliver the growth it promised may consider alternate positions:
- If Lowe’s is unable to use its financial engineering to get its share price higher, then it could be a value trap and shares could languish.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.
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