Lowe’s: Will This Important Message Send the Stock Higher?

With shares of Lowe’s Companies (NYSE:LOW) trading at around $38.58, 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

Lowe’s seems to be at the forefront of a new boom. The refinance boom has already been taking place for a while, but a new boom has now begun. It’s being referred to as the renovation boom. Since there is a low supply of homes, people are putting money back into their own homes. If this trend continues, then Lowe’s will be one of the biggest beneficiaries. According to the Joint Center for Housing Studies at Harvard University, spending on home improvement in 2013 is expected to increase by 10.6 percent in Q1, by 16.8 percent in Q2, and by 19.7 percent in Q3. This doesn’t by any means indicate that these predictions will be correct, but it is a sign of increased confidence.

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As far as the title of this article goes, it pertains to Lowe’s announcing that it will hire 45,000 seasonal associates ahead of the spring season as well as 9,000 permanent part-time positions. When a company is hiring at this rate, it’s a sign of strong health.

Let’s take a look at some important numbers for Lowe’s…

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio Lowe’s is normal. The balance sheet is in negative territory, but there is plenty of cash flow. The Home Depot (NYSE:HD) is a near mirror image, which is actually rare when looking at competitors in a specific industry.

Debt-To-Equity

Cash

Long-Term Debt

LOW

0.64

$1.30 Billion

$9.05 Billion

HD

0.61

$2.55 Billion

$10.81 Billion

 

T = Technicals on the Stock Chart Are Strong

Lowe’s has outperformed the S&P 500 for every timeframe listed below. However, Home Depot has been an even stronger performer. As far as yield goes, both companies are equal at 1.70 percent.

1 Month

Year-To-Date

1 Year

3 Year

LOW

10.08%

9.09%

46.03%

86.67%

HD

10.93%

9.65%

54.18%

165.40%

S&P500

5.48%

5.48%

15.92%

46.03%

 

At $38.58, Lowe’s is currently trading above all its averages.         

50-Day SMA

35.28

100-Day SMA

33.02

200-Day SMA

30.53

 

E = Earnings Have Been Steady

Earnings have been steady since 2009, but there hasn’t been much growth in that regard. On the other hand, there has been consistent revenue growth since 2010.

2008

2009

2010

2011

2012

Revenue ($)in billions

118.93

123.44

122.51

124.28

126.72

Diluted EPS ($)

1.86

1.49

1.21

1.42

1.43

 

When we look at the last quarter on a YoY basis, we see an increase in revenue and earnings.

10/2011

1/2012

4/2012

7/2012

10/2012

Revenue ($)in billions

11.85

11.63

13.15

14.25

12.07

Diluted EPS ($)

0.18

0.27

0.43

0.64

0.35

 

T = Trends Support the Industry

Low mortgage rates have led to improvement in housing. This, in turn, has led to more spending on homes. If home prices continue to improve, then we will see an increase in home construction jobs as well. While everything looks bright and rosy at the moment, keep in mind that we were here once before, and it wasn’t that long ago. Alan Greenspan lowered interest rates to absurd levels, which led to the housing boom. That story didn’t end well.

Conclusion

As long as low interest rates and reckless spending are the name of the game, the economy will continue to “improve,” and stocks such as Lowe’s will continue to rise. Eventually, this may all come to a screeching halt, but until that time comes, Lowe’s is a great place to be. This is a company that will be one of the first to benefit since it’s a leader in an industry that is experiencing a new boom.

Lowe’s is a great trade, but it’s not likely to be a safe long-term investment. For now, Lowe’s is an OUTPERFORM.

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