Lowe's Got Smashed! Was It Justified?

After reporting it's most recently completed quarters' earnings, shares of Lowe's fell more than 6%. The company, which happens to be the second-largest player in home-improvement retail with a market capitalization of $49.8 billion, second only to Home Depot with a market capitalization of $114.2 billion.

After such a tremendous fall, investors should ask themselves if Lowe's is a buy now or if more trouble lies ahead. To answer this question, I delved into its earnings report and compared it to Home Depot.

Earnings came up short
For the quarter, analysts expected Lowe's to report earnings per share of $0.48 on revenue of $12.7 billion. Revenue came in above estimates at nearly $13.0 billion, 1.9% higher than analysts expected and 7.3% higher than the $12.1 billion the company reported the same quarter a year ago. According to the press release, the majority of the increase in revenue resulted from comparable-store sales rising by 6.2%.

Net income for the quarter was even more impressive. For the quarter, it rose 26% from $396 million to $499 million. The primary drivers behind this improvement were twofold; increased revenue and cost containment. This is best demonstrated by looking at the company's cost of goods sold and selling, general and administrative expenses. For the quarter, the company saw its COGS decline from 65.7% of sales to 65.4%. Likewise, its SG&A expenses fell from 25% of sales to 24.6% this most recent quarter.

The improvement in earnings, combined with 79 million fewer shares outstanding, resulted in earnings per share of $0.47, one penny below forecasts. Though this shortcoming served to depress investors, it is a remarkable increase of 34.3% from the $0.35 per share the company reported in the same quarter last year.

Moving forward, analysts expect the company to post earnings per share for the current fiscal year of $2.15, 2.4% higher than the $2.10 it reported last year. If this comes to fruition, it would imply earnings per share for the company's fourth quarter of $0.31, a modest increase from the $0.26 it reported in the fourth quarter last year.

Lowe's vs. Home Depot
This week, Home Depot also reported earnings. Much to Mr. Market's surprise, the company earned $0.95 per share, 5.6% higher than the $0.90 that analysts expected and substantially higher than the $0.63 it earned last year. The increase in the company's bottom line came about as a result of revenue increasing 7.4% (due to an increase in comparable-store sales of 7.4%) combined with greater cost savings.

For the quarter, Home Depot saw its COGS decline from 65.4% of sales to 65.1%. On top of this improvement, it also experienced a substantial decline in its SG&A expenses, which fell from 22.8% of sales to 21%. Additionally, investors benefited from 81 million fewer shares outstanding, without which earnings per share would have fallen inline with analyst expectations.

Foolish takeaway
Looking at the performance of both Lowe's and Home Depot, we can see that neither company appears to be performing poorly. Rather, each entity is growing at a nice pace for their size and they are driving higher returns for shareholders due to cost containment and share buybacks. Furthermore, it would be a misstatement to say that Lowe's reported poor earnings for the quarter.

While even a penny can mean a lot for any individual company, it is doubtful that it was significant in the case of Lowe's. The underlying logic behind this is that, even though it missed on earnings per share, the company saw greater-than-expected revenue growth and a significant improvement in its profitability.

What the market seems to be doing here is punishing the company unjustifiably, not because it failed to meet earnings but because it did not beat forecasts like its larger rival, Home Depot. As such, this could provide the Foolish investor who believes Lowe's offers a good value proposition an opportunity to buy in at what they may perceive to be a discount.

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The article Lowe's Got Smashed! Was It Justified? originally appeared on Fool.com.

Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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