Will Lowe’s Build on This Year’s Gains?

With shares of Lowe’s Companies Inc. (NYSE:LOW) trading at around $38.71, 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 expects FY2013 of $2.05, total sales to increase by 4.0 percent, and comparable-sales to increase by 3.5 percent. These aren’t phenomenal numbers, but they’re solid. However, does it mean that Lowe’s is a good investment at this point in time?

Before we get to some important facts, it should be noted that while Lowe’s isn’t as big as The Home Depot (NYSE:HD), it’s known for offering a better shopping experience. Better signage helps, but the biggest difference is customer service. When you walk into a Lowe’s, someone is usually happy to help, and that person is usually knowledgeable. Is this due to efficient screening while hiring? Is it due to a better training program than what’s offered at Home Depot? Those questions can’t be answered here, but quality customer service has helped Lowe’s along the way.

Other positives for Lowe’s include:

  • Improved market share
  • Efficient merchandising strategy
  • Increased demand from Hurricane Sandy
  • Improving housing market

However, revenue growth has slowed, and the effects of Hurricane Sandy won’t last forever. Home Depot’s revenue growth hasn’t slowed.

The chart below compares fundamentals for Lowe’s, Home Depot, and Lumber Liquidator Holdings (NYSE:LL). Lowe’s has a market cap of $41.97 billion, Home Depot has a market cap of $104.67 billion, and Lumber Liquidators has a market cap of $1.81 billion.

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LOW

HD

LL

Trailing   P/E

22.38

23.49

39.70

Forward   P/E

14.95

17.27

25.65

Profit   Margin

3.88%

6.07%

5.79%

ROE

12.89%

25.42%

20.94%

Operating   Cash Flow

$3.76 Billion

$6.98 Billion

 $47.27 Million

Dividend   Yield

1.70%

2.20%

N/A

Short   Position

2.50%

1.20%

20.80%

 

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

E = Equity to Debt Ratio Is Normal    

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

Debt-To-Equity

Cash

Long-Term Debt

LOW

0.66

$666.00 Million

$9.08 Billion

HD

0.61

$2.52 Billion

$10.81 Billion

LL

0.00

$64.17 Million

$0

 

T = Technicals Are Strong

Momentum has slowed, but Lowe’s has put up some impressive numbers over the past three years. However, Lowe’s has underperformed Home Depot for every time frame listed below.

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1 Month

Year-To-Date

1 Year

3 Year

LOW

0.64%

9.36%

26.17%

67.46%

HD

1.08%

14.87%

44.75%

136.40%

LL

6.94%

28.30%

174.00%

154.00%

 

At $38.71, Lowe’s is trading above all its averages.

50-Day   SMA

38.40

100-Day   SMA

36.57

200-Day   SMA

32.56

 

E = Earnings and Revenue Have Been Steady          

These aren’t exceptional numbers, but revenue and earnings have consistently improved on an annual basis. Top-line growth has slowed, and it’s difficult to determine what the future holds. A lot depends on the status of the housing market.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

48.23

47.22

48.82

50.21

50.52

Diluted   EPS ($)

1.49

1.21

1.42

1.43

1.69

 

When we look at the last quarter on a year-over-year basis, we see mild declines in revenue and earnings.

1/2012

4/2012

7/2012

10/2012

1/2013

Revenue   ($)in   billions

11.63

13.15

14.25

12.07

11.05

Diluted   EPS ($)

0.27

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 Might Support the Industry

If interest rates remain low, then housing is likely to continue its recovery. This will be a big assist for Lowe’s and its peers. However, over the long haul, we’re looking at a definition-of-insanity situation. The last time interest rates were at record lows it caused an enormous housing bubble.

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Conclusion

Lowe’s is a strong company, but its success is closely tied to the status of the housing market as well as the health of the consumer. Both are somewhat unpredictable at the moment. Lowe’s has also underperformed Home Depot by a wide margin all-time. This is in addition to Home Depot offering a higher yield.

There is good upside potential for Lowe’s, but exterior concerns cause trepidation. Lowe’s is a WAIT AND SEE.

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