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Markets

Lowe's: Fear Factor

Worries over the housing market are weighing on this home-improvement chain's stock. But one analyst suggests looking at the larger picture.

The specter of a real-estate slowdown is turning any bad news about the housing sector into carnage in the stock market. Take the havoc wreaked on the shares of Lowe's. On Monday, the home-improvement chain reported that earnings in the quarter that ended April 30 rose 44%, to $1.06 per share. But the company trimmed its sales forecast for the fiscal year ending January 31 by one percentage point, and the stock dropped by 4.5% that day. "The feverish sell-off," said Raymond James analyst Budd Bugatch, "represents the victory of bearish sentiment toward anything housing-related over normally sound judgment."

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Sure, rising interest rates will dampen the short-term outlook for home sales. Housing has experienced an unprecedented boom that may peter out soon. And high gasoline prices mean consumers have less to spend on remodeling their bathrooms or upgrading their kitchens. But individual income growth and the overall level of home ownership are more important than the rate of home sales in determining sales trends at Lowe's, Bugatch says. "The slowing of home sales will have a relatively short-lived impact," he says.

A shift in strategy from "do-it-yourself" to "do-it-for-me" will buoy Lowe's expansion plans in uncertain times, says Chairman and Chief Executive Robert Niblock. He wants to generate more revenue and earnings through sales to professional contractors and installation services for homeowners. The company saw revenue climb 20%, to $11.9 billion, in the first quarter partly because of more sales of appliances and contractor supplies. Meanwhile, by one key measure, Lowe's is performing far better than its main rival, Home Depot. In 18 of the past 19 quarters, Lowe's has outpaced the larger Home Depot in sales growth at stores open a year or more.

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Lowe's, based in Mooresville, N.C., operates 1,258 stores in the U.S., many in suburbs and in smaller cities. Lowe's plans to add 155 stores by January 2007, with many of the units slated for larger cities, where Home Depot has more of a presence. Lowe's also wants to open stores in Canada by 2007.

On the surface, Lowe's looks like a bargain. Recently at $60, the stock (symbol LOW) has sunk 10% so far this year and trades at 14 times the $4.13 per share that analysts expect the company to earn in the current fiscal year. The price-earnings ratio, says Bugatch, is at its lowest point in 15 years. He has a 12-month target price on the stock of $78.50 and rates it a "strong buy." "Patient and foresighted investors have been presented with a compelling entry point," Bugatch says.

--Thomas M. Anderson

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