Lowe's (LOW) reports earnings tomorrow morning. Analysts expect adjusted earnings per share near $4.22 on revenue above $26 billion. Shares rose today after Home Depot's (HD) earnings. Since July 23rd the stock is up about 10% in an upward trend.
The competition with Home Depot
Home Depot's (HD) news release focused on professional contractors, who make up a large share of its customers. The do-it-yourself shopper is mainly a Lowe's (LOW) buyer. Lowe's is pushing hard to grow its professional segment too. These two names form a strong duopoly, with Home Depot the clear leader.
Lowe's (LOW) trades at a much lower valuation than Home Depot (HD). It has made acquisitions to build its professional business. Its average ticket size is higher and its comparable sales are higher. Lowe's paid $8.8 billion for Foundational Materials, a company that helps with professional building projects and moving those projects along. It also bought Artisan Design. Marvin Ellison, a former Home Depot employee, runs Lowe's. Folio's data showed Home Depot ahead in most metrics, so Home Depot looks better, but Lowe's is a strong competitor working to grow its professional side.
About 75% of Lowe's (LOW) revenue comes from do-it-yourselfers. If that group outperforms, it helps the company. Last quarter revenue grew 10% from a year earlier. On the professional side Lowe's holds only about 25%. The key thing to watch this earnings report: whether the acquisitions are helping Lowe's gain ground on the professional side. Same-store sales are weaker.
The stock hit an all-time high near $293 in February and now trades at $218, putting it in bear market territory going into the report. Recent lows were $199. The bar is low, much as it was for Home Depot (HD), but shares already popped after Home Depot's results, so the outcome is uncertain.
Bullish trade: 225 call calendar
This bullish paper-money trade uses the expected move and the gap in implied volatility. The August 21st implied volatility is about 63; the August 28th is about 43. The expected move is roughly $9. Since the stock is already up about $2 today, that move gets discounted a little.
The trade is a one-week-wide 225 call calendar, similar to a Home Depot (HD) trade done the day before. Buy the August 28th weekly 225 call and sell the August 21st 225 call, which expires in 3 days. The debit is about 85 cents, so risk is $85 per spread. It was trading near 90 cents. The option market is pricing about a $9 move in either direction, and a one-day move into the end of the week near $10.30, which lines up with the 225 strike on the upside.
Maximum profit lands at or near the 225 strike. The rough profitable range runs from about 215 on the downside to about 235 on the upside. The lower implied volatility bought in the August 28th options versus the higher volatility sold in the near-term options cuts the cost of the trade while still giving upside exposure for only $85 in risk. The trade loses if the stock falls, or if it makes a two- or three-standard-deviation move above 230 to 235. The stock needs to move toward 225 to work.
Bearish trade: 210 put calendar
Same strategy, opposite direction, for anyone expecting a pullback after earnings. It is a one-week-wide bearish put calendar on the 210 strike, about one standard deviation below the current share price. Buy the August 28th weekly 210 put and sell the August 21st weekly 210 put, which expires in 3 days. The debit was about 60 cents earlier ($60 risk) and closer to 90 cents now ($90 risk). The bid-ask spread is wide, so some price checking is warranted. The profitable range runs roughly from about 200 to about 220. The stock needs to move toward 210.
Combining both
Neither trade is a sure thing; the stock has to move the right way, and it could overshoot or underperform. Doing both trades together builds a double calendar. That widens the range to about 200 on the downside and 235 on the upside, giving exposure to both directions at about one standard deviation for more cost. Calendars target single strikes, but each still has a profitable range outside that strike.
