Is Lowe's a Buy After Missing Fourth-Quarter Expectations

Lowe's (NYSE: LOW  ) , the second-largest home improvement retailer in the world, has just released its fourth-quarter report for fiscal 2013. The company's results missed expectations but its shares rallied higher anyway, which leaves investors wondering where it could go from here. Let's dig deep into the report and decide if we should initiate positions in Lowe's right now or if we should wait for the shares to come back down.

The quarterly results
Lowe's released its fourth-quarter report before the market opened on Feb. 26 and the results came in below expectations; here's a breakdown and a year-over-year comparison:

Metric Reported Expected
Earnings Per Share $0.29 $0.31
Revenue $11.70 billion $11.73 billion

Excluding certain charges, earnings per share came in at $0.31 for an increase of 19.2% year-over-year, which matched the consensus estimate. The company's revenue increased by 5.6%, which was driven by a 3.9% increase in comparable-store sales as Lowe's showed strength even during the trying times of cold weather that many of its stores faced. Gross profit rose 6.8% to $4.04 billion and the gross margin fought upward, expanding 40 basis points to 34.67%.

In addition, Lowe's noted that it repurchased $958 million worth of its common stock and paid $189 million in dividends during the quarter. The board of directors also authorized the repurchase of an additional $5 billion shares on top of the $1.3 billion that remained in its current repurchase program, which adds up to $6.3 billion in authorizations as of Jan. 31.  Overall, this was a great quarter for Lowe's and the dividend and share repurchase updates show that it is still fully dedicated to increasing shareholder value. With this said, the key metrics did miss expectations on both the top and bottom lines, so I am wary about the stock's large move upward.

Source: Lowe's

What will fiscal 2014 hold?
In its report, Lowe's also gave its guidance on the fiscal year ahead. Here's what it expects to see:

  • Earnings per share of approximately $2.60, a 21.5% increase from fiscal 2012
  • Revenue increasing by approximately 5%
  • The opening of approximately 15 new home improvement stores and five hardware stores
If the company can deliver on these expectations while paying its healthy 1.5% dividend and repurchasing a few billion dollars worth of its common stock, there is no doubt in my mind that the stock can set new highs throughout the year. However, I am still not sold on the rally following the missed earnings expectations, so I would like to see Lowe's shares come down a bit before initiating a position.

An industrywide rally 
As Lowe's missed expectations and rallied, its largest competitor, Home Depot (NYSE: HD  ) , did investors one better by reporting a mixed quarter and rallying. Home Depot reported earnings per share of $0.73 on revenue of $17.70 billion versus expectations that called for earnings of $0.71 on revenue of $17.99 billion; this resulted in earnings per share increasing by just 7.4% and revenue declining by 3% year-over-year, but the company made a bullish move by increasing its dividend by 21%.

Source: Home Depot

Home Depot also provided a strong outlook on fiscal 2014 and its shares reacted by rising nearly 4% during the next trading session. The stock has risen further since then and I believe it will continue to do so for the remainder of the year; Home Depot will provide additional returns via its 1.9% dividend and an estimated $5 billion in share repurchases during the year. When it comes to the choice between Lowe's and Home Depot, investors could take their pick of these companies and do no wrong for their portfolios.

The Foolish bottom line
Lowe's has achieved a very uncommon feat by missing expectations and watching its shares rally higher anyway. This could be due to the company's strong outlook on 2014 or its $5 billion in additional share repurchases, but the Street is not complaining either way. I believe that Lowe's earnings expectations could support a continued rally throughout the year, but Foolish investors should be wary of the upward move that the stock has already made. For this reason, I would like to see the stock come down a bit before initiating a position.

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