Could Lowe’s Get Investors Much Higher?

With shares of Lowe’s Companies Inc. (NYSE:LOW) trading at around $42.97, is LOW an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

If you live near a Lowe’s then there’s a good chance that you also live near a Home Depot. If that’s the case, then there’s an important question that must be asked. When it rains, does it only rain over Lowe’s? If that’s the case, then your town or city has an atmospheric phenomenon. However, if this doesn’t happen where you live, then it sounds like Lowe’s is making excuses. There’s no other way to spin it, considering Lowe’s blamed the weather for a poor quarter while The Home Depot (NYSE:HD) shrugged off the weather as though it was a mosquito sitting on its shoulder at a Sunday night barbecue.

Home Depot is winning this battle in strategic locations and merchandising, and it’s now ahead in cost management. Some people might be wondering how Home Depot consistently outperforms Lowe’s when Lowe’s is widely known for offering such better service. A lot of it has to do with contracting. Approximately 35 percent of Home Depot sales are from contractors. Only 25 percent of Lowe’s sales are from contractors. Therefore, retail shoppers are more important to Lowe’s and must be treated with more respect. Lowe’s is attempting to improve retail sales by increasing effective worker hours.

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Lowe’s Q1 diluted EPS came in at $0.49 on $13.1 billion in revenue. Comps were down 0.7 percent while Home Depot comps were up 4.3 percent. Lowe’s missed expectations, but it was a year-over-year improvement in earnings, and only a slight decline in revenue. Gross Margins also increased 10bps. For FY2013, Lowe’s expects diluted EPS to come in at $2.05, which would be a substantial improvement over last year. Total sales are expected to increase 4 percent, comp sales are expected to increase 3.5 percent, and the company expects to open 10 stores. It should also be noted that Lowe’s saw significant improvements in sales in April and May.

Now let’s get to some numbers. Below is a chart comparing fundamentals for Lowe’s and Home Depot.

Trailing P/E 25.43 26.56
Forward P/E 16.92 19.25
Profit Margin 3.88% 6.07%
ROE 12.89% 25.42%
Operating Cash Flow 3.76B 6.98B
Dividend Yield 1.50% 2.00%
Short Position 1.20% 2.70%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Strong

Lowe’s has underperformed Home Depot over the past three years, but it’s doubtful that any Lowe’s investors would complain about the stock’s performance. This is in addition to a 1.50 percent yield.

1 Month Year-To-Date 1 Year 3 Year
LOW 13.20% 22.01% 71.19% 88.81%
HD 7.69% 29.55% 70.93% 161.4%
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At $42.97, Lowe’s is trading above its averages.

50-Day SMA 39.56
200-Day SMA 37.32

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Lowe’s is close to the industry average of 0.50.

Debt-To-Equity Cash Long-Term Debt
LOW 0.66 666.00M 9.08B
HD 0.61 2.52B 10.81B

E = Earnings Are Steady

Annual earnings haven’t been outstanding, but they have been consistent. The same can be said for annual revenue.

Fiscal Year 2009 2010 2011 2012 2013
Revenue ($) in millions 48,230 47,220 48,815 50,208 50,521
Diluted EPS ($) 1.49 1.21 1.43 1.43 1.69

As stated earlier, Q1 EPS was $0.49 on $13.1 billion in revenue. Below is a look at the four previous quarters.

Quarter Apr. 30, 2012 Jul. 31, 2012 Oct. 31, 2012 Jan. 31, 2013
Revenue ($) in millions 13,153 14,249 12,073 11,046
Diluted EPS ($) 0.43 0.64 0.35 0.26

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry (for now)        

As long as the real estate market continues to perform well, home improvement stores should continue to perform well. However, it should be noted that we’re not in a natural recovery. Real estate prices wouldn’t be accelerating at this pace if interest rates were at normal levels. Therefore, it’s not likely that this strong upward move is sustainable. The good news is that the real estate market should stay afloat longer than the stock market in this round, which would lead to home improvement stores being more resilient in a bear market. That being the case, there should be clues as to when to exit. This is a nice luxury as it isn’t found in most industries.

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For now, Lowe’s is an OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t own any positions in this stock.