Tuesday, September 25, 2007

Is Lowe's Setting Us Up?

Did you ever read something that just did not jive with what you were witnessing?

Yesterday, Lowe’s (LOW), the second-largest home improvement chain after Home Depot (HD), said it now expected profit for the year ending in February to be at the low end or below a forecast of $1.97 to $2.01 a share it gave in August. Currently, analysts expect a profit of $1.99 a share equal to last year. The result of that warning was a 3% haircut for shares after hours yesterday and continued weakness this morning with share opening down 5%. A bit of an overreaction to a company essentially reaffirming estimates albeit at the low end?

They cited "drier" than normal conditions in much of the country that were keeping people from purchasing lawn and garden accessories. Makes sense. Except, I live in the Northeast and we have had probably 3 rainy days since July 4th and are currently under "drought" watering conditions. Yet, despite this, the local Lowe's I was at this weekend was just a busy as usual. Now obviously you cannot extrapolate the entire chain from one location but that location in experiencing the very conditions they gave for the potential shortfall. Odd. This warning is also odd in that earlier this year Lowe's told us they were seeing "improving" conditions in many areas. Just does not add up.

They also backed expectations of average growth of 12 percent to 15 percent in profit per share each year from 2008 through 2010, while total sales rise 8 percent to 11 percent a year during that time.

What to think? Lowe's is giving us the worst case scenario. What is most likely to happen is a meet or more likely beat of these lowered expectations. Between the two chains (HD & LOW) Lowe's is by far the better run and better situated to capitalize on any improvement. Having spent the last three years stealing market share from home depot every quarter, Lowe's will see result catapult when things settle.

This may be a tremendous time to buy shres...

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