Yet again, Lowe's (NYSE: LOW ) posted a weak quarter. For example, same-store
sales fell by 0.03%. Keep in mind that the company had projected that there
would be a 2% increase. In fact, Lowe's cut its full-year earnings-per-share
forecast from $1.56-$1.64 to $1.48-$1.54. The company also reduced its top-line
guidance from 4% to 2%. So, as should be no surprise, Lowe's shares have been
terrible in 2011. The stock price is off about 22%. Despite all this, might
Lowe's be able to make a turnaround and get back to rewarding shareholders? To
see, let's take a look at the pros and cons: Pros Efficient platform. The
downturn in the home improvement market has forced Lowe's to focus on lowering
its cost structure. It certainly helps that the company has massive scale, which
allows for better negotiating power with vendors. But Lowe's also has a
state-of-the-art logistics system. In fact, the company is rolling out 42,000
mobile devices to its work force to improve inventory tracking and sales volume.
Online. Lowe's has been investing aggressively in lowes.com. For example,
there is now a helpful Q&A section, which involves the participation of
employees and vendors. The company also will launch an Apple (NASDAQ: AAPL )
iPhone app within a few weeks. Dividends. Lowe's has a fairly strong balance
sheet, with a modest amount of debt. The company also has a long history of
generating hefty cash flows and paying dividends. The current yield is 2.9%.
There also have been aggressive share buybacks. These came to $1.4 billion in
the latest quarter. Cons Weak economy. The latest reading of consumer sentiment
plunged from 63.7 in May to 54.9 in August. It is the lowest level since 1980.
At the same time, the gross domestic product is running at an annual rate of
1.3%. In other words, there definitely are fears that we will see a double-dip
recession. No doubt, the result certainly would be damaging for Lowe's as
consumers inevitably will cut back on big-ticket items. Government support. Last
year, Lowe's benefited from programs likes Cash for Appliances as well as the
Homebuyer's Tax Credit. However, such initiatives are not likely to be
repeated. The federal government, of course, is moving toward fiscal austerity.
Real estate. Even if there is no double-dip recession, there likely still will
be a drag for Lowe's. The main reason is the continued weakness in the real
estate markets. Foreclosures remain high and home prices are depressed. What's
more, job growth is likely to remain stagnant. Verdict Lowe's has a strong
national footprint and a streamlined cost structure. Its stores also offer a
broad array of products. Yet the key to driving the stock price will be a
turnaround in the real estate market. Unfortunately, this could easily take
several years. So even though Lowe's has an attractive dividend and the
shares are trading at a reasonable valuation of 13 time earnings the cons still
outweigh the pros. Tom Taulli is the author of various books, including "All
About Commodities" and "All About Short Selling." You can find him at
Twitter account @ttaulli . He does not own a position in any of the stocks named
here.
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