Lowe's shares have recently seen a significant surge, nearing their 52-week peak. This upward trend is largely driven by market optimism regarding a potential rebound in the housing sector. However, a deeper analysis reveals potential headwinds, including the company's increased debt load due to recent acquisitions and a temporary halt in share repurchases. Given the modest growth forecasts for its earnings per share in the coming years and a potential 15% drop from its current valuation, investors may consider reevaluating their positions in Lowe's after its recent gains.
Over the past year, Lowe's stock performance has been quite volatile, resembling a rollercoaster. Despite this, the stock is currently hovering close to its highest point in 52 weeks, showing a 6% increase from the previous year. This resurgence is primarily fueled by positive sentiment surrounding an anticipated recovery in housing-related expenditures. The market appears to be pricing in a strong rebound, suggesting that investors are hopeful for increased consumer spending on home improvement projects.
However, Lowe's recent corporate activities introduce a layer of complexity. The company completed a major acquisition, purchasing FBM for $8.8 billion. While this move aims to bolster Lowe's market position, it has also led to a substantial increase in its leverage, pushing it to 3.4 times, which is above its targeted level. Consequently, the company has had to suspend its share buyback program, a common strategy used to enhance shareholder value. This pause could limit upward pressure on the stock in the near term.
Looking ahead, Lowe's has provided guidance for its fiscal year 2025 earnings per share (EPS) to be between $12.22 and $12.32. For 2026, the EPS is projected to be slightly higher, in the range of $12.75 to $12.90. These figures indicate a relatively modest growth trajectory. Furthermore, the increased leverage from the FBM acquisition is expected to result in higher interest expenses, which will likely put additional pressure on future earnings. This financial outlook suggests that the path to substantial shareholder returns might be constrained by these factors.
Considering these elements, the current valuation of Lowe's shares appears to be at a premium, possibly overstating the speed and magnitude of a housing market recovery. With limited catalysts expected in the near term and an estimated fair value ranging from $230 to $235, there's a potential downside risk of 15% from its current trading price. For investors who have benefited from the stock's recent recovery, it might be an opportune moment to consider divesting their holdings to mitigate potential future losses.
In conclusion, while Lowe's has recently enjoyed a favorable market sentiment, leading to a climb in its stock price, underlying financial indicators and strategic decisions present a more cautious outlook. The elevated leverage and modest earnings growth projections suggest that the stock may be overvalued relative to its future prospects. Therefore, a prudent approach for investors might involve exiting their positions in Lowe's to capitalize on its recent upward movement before potential market corrections.