Lowe’s Companies, Inc. LOW, a prominent name in the home improvement retail sector, is currently trading at a forward 12-month price-to-earnings (P/E) ratio of 20.12. This valuation reflects a discount compared to the industry’s average of 23.98 and the S&P 500's P/E of 22.67. However, the stock appears relatively expensive compared to its median P/E level of 18.71, observed over the past year.

LOW Valuation Picture

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A recent dip in Lowe’s stock price may have contributed to its discounted P/E. Over the past month, shares of Lowe’s have declined 3%, in stark contrast to the industry’s 1.7% gain.

Lowe’s Past Month Performance

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This raises an important question: does the current valuation offer a compelling buying opportunity, or should investors exercise caution, given the above-median valuation? Let’s analyze the numbers and market trends to determine the potential path forward.

Lowe’s stock closed at $249.81 yesterday, sitting 13% below its 52-week high of $287.01, attained on Oct. 15, 2024. The stock is currently trading below its 50-day moving average, signaling a potential slowdown in momentum.

LOW Trades Below 50-Day Moving Average

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Lowe’s Total Home Strategy: A Blueprint for Growth

Lowe’s remains well-positioned to capitalize on the opportunities arising from the recovery in the home improvement market. The company has unveiled its 2025 Total Home Strategy, a comprehensive roadmap to enhance its market share. The strategy involves a focus on Pro penetration, e-commerce acceleration, home services expansion and customer loyalty programs. 

The company has already achieved significant success in Pro penetration, reaching a 30% market share. Lowe’s plans to relaunch its Pro loyalty program as "MyLowe’s Pro Rewards" in early 2025. The new program is designed to simplify the process of earning and redeeming rewards. Moreover, customers using the “MyLowe’s Pro Rewards Credit Card” will be eligible for a 5% discount every day.

In a major move, Lowe’s launched the first product marketplace in the U.S. home improvement industry, significantly broadening its digital assortment. The marketplace offers a wider product catalog from new sellers and existing suppliers catering to value-conscious and premium customers. This approach positions Lowe's as a one-stop shopping destination. 

Lowe’s is integrating AI technology into its operations to improve online search, product recommendations and demand planning. This use of AI will streamline operations, improve productivity and enhance the overall shopping experience, all of which are expected to enhance operational efficiency.

Lowe’s isn’t just growing digitally. It is expanding physically as well. The company plans to open 10-15 new stores annually in high-growth U.S. markets. Moreover, to cater to underserved rural communities, Lowe’s is extending its rural offering to 150 additional stores, bringing the total count to nearly 500. On top of this, the company, through its next phase of enterprise-wide Perpetual Productivity Improvement initiatives, aims to generate about $1 billion in annual cost savings.

Lowe’s Battles DIY Weakness and Competition

Lowe's continues to face significant pressure in its DIY (Do-It-Yourself) discretionary categories, particularly those linked to larger, big-ticket projects such as kitchen and bath remodels, flooring and decor. These categories depend heavily on macroeconomic conditions, which remain strained.

In the third quarter of fiscal 2024, comparable sales were down 1.1%, with a notable decline in big-ticket DIY transactions. This segment represents a significant portion of Lowe's revenues, and ongoing softness signals prolonged headwinds for growth. Management expects comparable sales to decline between 3% and 3.5% for the current fiscal.

Competition within the home improvement sector remains fierce. Rivals like The Home Depot, Inc. HD, Floor & Decor Holdings, Inc. FND and Builders FirstSource, Inc. BLDR continuously innovate and expand their offerings. Lowe's may find it challenging to maintain or grow its market share if competitors launch aggressive pricing strategies. While Lowe's is investing in its Total Home strategy, the necessity to differentiate in a crowded market can place additional pressure on margins.

Management also disclosed that 40% of Lowe’s cost of goods sold is sourced from outside the United States, leaving it vulnerable to potential tariff increases under the incoming regime. These trade policy changes could lead to significant cost pressures, particularly for price-sensitive categories. While Lowe’s has diversified its supply chain in recent years, the potential for increased sourcing costs could squeeze margins further and limit pricing flexibility.

How Consensus Estimates Stack Up for Lowe’s

Reflecting a more cautious outlook for Lowe’s, the Zacks Consensus Estimate for earnings per share has experienced downward revisions. Over the past 30 days, the consensus estimate has dipped by two cents to $1.81 for the final quarter of fiscal 2024 and by five cents to $3.12 for the first quarter of fiscal 2025. 

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Final Verdict on Lowe’s

Lowe’s appears attractive relative to industry peers and the broader market but slightly expensive compared to its historical median level. The recent dip in stock price, coupled with trading below the 50-day moving average, suggests a loss of momentum, potentially signaling caution for investors. Challenges in the DIY category, intensified competition and cost pressures from external sourcing highlight the complex landscape Lowe's navigates.

However, the company's strategic initiatives, such as the Total Home Strategy, e-commerce advancements, and AI-driven operational improvements, underscore its growth potential. Moreover, in light of the Federal Reserve's recent interest rate cut, Lowe's stands to benefit as lower borrowing costs can stimulate consumer spending on home improvement projects. With risks and rewards in balance, it may be prudent to stay on the sidelines for now. Lowe’s currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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