Option Trade 
Lowe's Companies, Inc. (NYSE:LOW) Calls
Tuesday, May 23, 2017

** OPTION TRADE: Buy the LOW JULY 21 2017 85.000 CALL at approximately $2.65. Place a pre-determined sell at $5.30.

Note: No protective stop losses added -- but if you wish to do so make it $1.05.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

Lowe's Companies, Inc. (NYSE:LOW), a home improvement retailer, is scheduled to announce its 1Q17 earnings before the market opens on May 24, 2017. Since the announcement of its 4Q16 earnings on March 1, 2017, the stock has risen 15.1%.

Lowe’s started 2017 on a bright note with its stock rising 20.3% since the beginning of 2017.

Lowe's is seeing favorable earnings estimate revision activity as of late, which is generally a precursor to an earnings beat. After all, analysts raising estimates right before earnings—with the most up-to-date information possible—is a pretty good indicator of some favorable trends underneath the surface for LOW in this report.

Wall Street's consensus forecast calls for EPS at this North Carolina-based retailer to have risen from $0.87 in the same period of last year to $1.06. The consensus estimate for the three months that ended in April is $1.08.

For 2017, the company’s management set the EPS guidance at $4.64—growth of 16.3% from $3.98 in 2016. Analysts expect the company to post EPS of $4.65—year-over-year growth of 16.8%. Analysts expect EPS growth to be driven by revenue growth, expansion of net margins, and share repurchases.

Analysts expect Lowe’s to post revenue of $16.9 billion in 1Q17, which represents growth of 11.1% from $15.23 billion in 1Q16.

For 2017, analysts expect Lowe’s to post revenue of $68.32 billion—growth of 5.1% from $65.02 billion in 2016. Revenue growth is expected to be driven by same-store sales growth of 3.5%, the addition of 35 new stores, and increased sales from the acquisition of RONA. The company’s management set revenue growth guidance of 5% for 2017.

Lowe's Companies has a market cap of $72.06 billion, a price-to-earnings ratio of 24.22 and a beta of 1.28. The company’s 50-day moving average price is $83.86 and its 200-day moving average price is $76.96. Lowe's Companies, Inc. has a 52-week low of $64.87 and a 52-week high of $86.25.

Influencing Factors to Consider

Revenue growth is expected to be driven by positive same-store sales growth, the acquisition of RONA in May 2016, and an increased number of stores. By the end of 4Q16, the company operated 2,129 stores—compared to 1,860 in 1Q16.

Analysts expect Lowe’s same-store sales growth to be driven by the rollout of interior project specialists across all of its US stores, the redesign of its website with advanced features, and the launch of “lowesforpros.com”—another website for professional customers. The company’s management also expects the omnichannel kitchen, bath, and outdoor segments to do well during 1Q17—they offer superior value, compelling content and unique customer touch points.

Also, improvement in macroeconomic factors—such a rise in the housing price index, lower unemployment, and an increase in home sales—are expected to drive the company’s revenue in 1Q17.

The EPS is expected to be driven by revenue growth, expansion of net margins, and share repurchases in the last 12 months. Share repurchases reduce the number of shares outstanding and boost the company’s EPS.

Analysts and Hedge Funds Opinions

Top hedge funds & private equity firms are betting big on Lowe’s.

With LOW stock still trading at reasonable earnings multiples, more upside seems likely. And Q1 earnings could be a catalyst for that upside.

Last year’s acquisition of Rona should add 6 points or so of growth — half of Street estimates. LOW has added another 40 or so stores since last year, providing another 2-3 points of benefit. In other words, analysts seem to be projecting roughly 3-4% same-store sales growth.

That’s right in line with full-year guidance. And while adjusted EPS growth of 22% seems aggressive, LOW’s guidance looks reasonably conservative.

Management said on the Q4 conference call that Lowe’s earnings growth would come from operating leverage, not gross margin. That leaves some room for Lowe’s to again beat expectations on the bottom line in Q1.

Meanwhile, U.S. government retail sales figures for April showed strength in building products. That bodes well for both LOW. And with Lowe’s stock pulling back modestly into the report, the possibility of a “beat and fall” quarter, in which ‘unofficial’ expectations lead the stock down, looks diminished.

Also, several brokerages recently weighed in on LOW…..

  • BMO Capital Markets restated a “buy” rating and set a $89.00 target price on shares of Lowe's Companies in a report on Friday, May 5th.
  • Credit Suisse Group AG set a $94.00 target price on Lowe's Companies and gave the company a “buy” rating in a report on Tuesday, May 2nd.
  • Finally, Jefferies Group LLC increased their target price on Lowe's Companies from $80.00 to $94.00 and gave the company a “hold” rating in a report on Friday, May 12th.

Two analysts have rated the stock with a sell rating, eleven have given a hold rating and fourteen have assigned a buy rating to the company’s stock. The stock currently has an average rating of “buy” and an average price target of $89.24.

As well, Moody National Bank Trust Division continued to hold its position in Lowe's Companies, Inc. during the first quarter, according to its most recent Form 13F filing with the SEC. The fund owned 22,350 shares of the home improvement retailer’s stock at the end of the first quarter. Moody National Bank Trust Division’s holdings in Lowe's Companies were worth $1,837,000 as of its most recent SEC filing.

Harvey’s Options Volatility Indicator


In the end, Lowe’s look enticing, given the macro tailwinds and the operational diligence being experienced. And ahead of the print, considering nothing but good news has come out of the home improvement space so far this year; LOW might be set up for an earnings beat that could send share prices higher by the end of this week.


Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the LOW JULY 21 2017 85.000 CALL at approximately $2.65. Place a pre-determined sell at $5.30.

Note: No protective stop losses added -- but if you wish to do so make it $1.05.

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