Lowe's rises after Q1 beat, but don't buy high

Posted May 18th 2009 3:40PM by Steven Mallas
Filed under: Earnings Reports, Home Depot (HD), Lowe's Cos (LOW)

So, the story doesn't start off so well. Lowe's (NYSE: LOW) issued its Q1 numbers earlier today, and right off the bat, beginning at the top line, you see that net sales declined over 1%. Then you notice that profit on a dollar basis plunged over 20%. Earnings per share? That also took a dive of over 20%.

Then you look at the stock. And you say to yourself, "what's going on?" As I write this, with less than three hours to go in the trading day, shares of Lowe's are trading almost 10% higher! On excellent volume, too. As you might have thought, an earnings beat was lurking somewhere in the plot of this particular tale. Lowe's earned $0.32 per share in Q1. According to Trey Thoelcke's earnings preview, the market thought that only $0.25 could be achieved. This differential is helping to fuel the buying.

The retail metric that I (as well as everyone else, for that matter) always look at, same-store sales, did not do well in Q1. Lowe's said that comps declined 6.6%. That's too close to the mark of the beast for my comfort!

I can see all the market excitement, however. Besides panicking short sellers, I'm sure there's a bunch of new buying going on as investors do not want to miss getting in on the current bullish sentiment. I've been looking for a substantial correction before the summer begins, but so far it's been elusive.

Wall Street wants to believe that the bad numbers are almost behind us. Companies like Lowe's and Home Depot (NYSE: HD) should theoretically be bought on the assumption that everything is priced in; at least, that's what all this buying seems to suggest.

Not only was the earnings beat a source of euphoria, but I believe the improvement in gross margin also grabbed the attention of institutions. The expansion in that statistic was good, I have to admit.

Taking everything in total, I can get behind the idea that Lowe's needs to be looked at and strongly considered. However, it shouldn't be considered today. The stock is too high this afternoon. And I must highlight again the poor same-store sales. I'd really be more comfortable buying the stock when those take a decisive turn to the upside.

Disclosure: I don't own any company mentioned; positions can change without notice.

Tags: featured, HD, Home Depot, home improvement, HomeDepot, HomeImprovement, LOW, lowes, retail, trey thoelcke, TreyThoelcke