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Should Investors Worry About Holding Lowe’s Stock?

Lowe’s (NYSE: LOW) thrived at the pandemic’s onset. Home improvement became a popular pastime when folks were stuck at home during lockdowns. Fortunately, several effective vaccines were developed against COVID-19, allowing business restrictions to be removed. 

Now that folks have more options, the phenomenal sales growth Lowe’s experienced is slowing. With that backdrop, should investors worry about owning Lowe’s stock? Let’s answer the question below. 

Sales are moderating, but Lowe’s expects profits to grow

In its most recent quarter, which ended April 29, Lowe’s reported that its sales decreased by 3.1%. That comes after Lowe’s reported sales growth of 24.1% in the comparable quarter in the prior year. With more options on what to do with their time and money, consumers are making home improvement less of a priority n their budgets.

LOW Revenue (Quarterly YoY Growth) data by YCharts

To make matters worse, the lack of fiscal stimulus and rising inflation reduce consumers’ disposable income. The macroeconomic backdrop was a massive tailwind for Lowe’s this time last year but has turned into a headwind. The one thing that is still working in Lowe’s favor is that home values keep making record highs. When house prices are rising, folks feel that spending on their home is an investment rather than an expense.  

Still, Lowe’s sales of $23.6 billion in the quarter ended in April were $4 billion higher than the comparable quarter in 2020. Understandably, sales would fall back after the surge it experienced in the two years since the pandemic’s onset. Lowe’s grew revenue in the previous decade at a compound annual rate of 6.7%. But it expanded in the last two years at 24.2% and 7.4%.

For its fiscal year 2022, Lowe’s expects sales of $98 billion at the midpoint. That would be a slight increase from the $96 billion it earned in its most recently completed fiscal year. CEO Marvin Ellison took an optimistic tone in prepared remarks that accompanied its first-quarter earnings release, saying “Despite some increased uncertainty in the macro-environment, we remain confident in the outlook for the home improvement market and our ability to deliver operating margin expansion in 2022.”

Investors should not worry about owning Lowe’s stock

To answer the question in the headline, investors should not worry about owning Lowe’s stock. Sure, sales growth will moderate as consumer spending evolves through economic reopening. Despite a 4% revenue decrease, Lowe’s managed to increase its net profit margin to 9.86%. That was up from 9.5% in the comparable quarter last year — an impressive feat considering rising costs affected all kinds of businesses to start the year.

LOW PE Ratio data by YCharts

What’s more, Lowe’s stock is not particularly expensive. Trading at a price-to-earnings ratio of 15 and a price-to-free cash flow mark of 18, it’s reasonably priced. That leaves wiggle room in case revenue headwinds are worse than expected, lowering profits and cash flow. For those reasons, investors should not worry about Lowe’s stock

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool recommends Lowe’s. The Motley Fool has a disclosure policy.

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