Like many homeowners, I try to do as many do-it-yourself jobs as possible. I just finished painting my kids' rooms with paint and brushes I bought at Home Depot (NYSE:HD), and my wife and I bought all of our appliances from Lowe's (NYSE:LOW).
With rates on 30-year mortgages hitting a four-month low last week and Fed Chairman Alan Greenspan holding the line on his quarter-point interest rate hikes (for the time being), the outlook for home improvement retailers remains optimistic. The strong housing cycle doesn't appear to be changing just yet; high oil prices and weak unemployment figures gave Greenspan economic pause for a minute.
Scanning Lowe's second-quarter earnings release, it appears that the company is about to hit another of its housing minibooms. The quarter started well in May, took a slight dip in June, and then finished very strong in July. This positive trend has trickled into the third quarter, which prompted the company to raise its expectations from $0.64 a share to a range of $0.65 to $0.66 per share. Lowe's also forecasts a healthy 15% revenue increase for the third quarter; sales were previously expected to be about $8.98 billion but are now seen at $9.11 billion.
Lowe's shares are up nearly 6% today in early trading on the positive trend development, which basically swept aside the fact that the company missed its earnings target by a few cents in the second quarter ($0.89 reported vs. $0.91 expected). What impresses me about Lowe's is that it is expecting 3% to 4% increases in same-store sales in the face of difficult year-over-year comparisons. The company preaches continual "store investment" and "excellent customer service," and it delivers. I have had nothing but positive experiences, including replacing a toilet that I bought and didn't like. Lowe's not only helped me pick out a new one but also installed it at no charge and hauled off the old toilet.
With trends and cycles being important to investors, it is always critical to see what's coming in order to ride a positive wave or avoid potential problems. And with interest rates and the housing market still strong, consumers continue to gravitate to home improvement stores. I see Lowe's shares, which are currently trading at only 15 times the 2005 earnings forecast of $3.35 per share, as a very attractive investment relative to its expected 24% growth rate next year.
Fool contributor Phil Wohl spent more than 12 years on Wall Street and now concentrates his writing on more fictional characters. He has no stake in any firm mentioned above.
