Thesis: Range-bound stalwart moving to the lower end of the 52 range with a solid FCF yield, defensible business model, and margins below its primary competitor that buys its own shares and pays a dividend which could rerate as soon as the next quarterly report.
Business: I won't spend much time here - Jamal wrote this up at $20 in 2011 and it was written a couple years previous and that would have obviously been a nice time to own this, but this is 2016 and if you can find really striking ideas in a happy market you are doing much better than me.
Plus, as I am a VIC holdover from long ago, I simply don't have the resources to explain every nook and cranny of this stock. Also, unlike the vast majority of folks on this board, I actively outsource my job to many other folks including Value Line for data, Morningstar for industry and management commentary, and any sell-side report I can find that gives me some sort of opinion - of which you can find many on this stock. However, my favorite analysis of Lowe's - the most coherent - is by the newsletter writer in Morningstar StockInvestor.
So, in my usual fashion, here is what I like and not like about this stock:
from 2015 - Data Points
5 Year CFFO 21935, CF 19265, CapEx 7047, Acq 606, BB 18870, Divi 3863
Key Factors: Margins, Comps; Unit Growth; Capital Allocation
Five: Operating Margin 35.1 high in 2010; low was 34.2% in 2008
Top Line Growth – 9.5 and 7.5% last 5 years
Saturation: nearly there but plans for 45 stores or about 2 to 3% growth
BS: Buybacks are huge focus
Management: Morn says good; CEO pay 13.1 (previous two at 14.3-18.7); others in 2015: 4.9 to 2.7; this is very low
Neg Debt on BS; Outspends CFFO; Rona unknown; valuation range
Future PE VL $4.55 for 1-2018, at 15.4x
Category: I think this is a stalwart with consistent earnings. The median PE for Lowe's is 16x which is cheap in a world of 1.6% 10 year treasury rates. There is no reason LOW should trade for lower multiples than other typical stalwarts; based on VL forecast of $4.65 (prob too high though) it trades for 15.3x 2017 earnings.
5 year: CFFO is nearly 3.1x CapEx; Before Rona (mentioned later), acquisitions were not important. The main use of cash flow has been buybacks. The company has been a consistent buyer of its own shares in a DCA fashion - with 3.0 to 4.4 range for each of the last 5 years. If the stock goes down, buybacks become more favorable.
I think the key factors are margins, comps, unit growth, and capital allocation, with comps driving the stock up and down even though they shouldn't.
1 - margins are consistent here. VL shows OM at a low of 34.2% during the end of the world in 2008 and a high of 35.1% in 2010. Gross margins are rock solid (HD is 32.8 to 34.2%). LOW is the picture perfect stalwart investment.
2 - top line growth - VL shows 5 year top line at 11.5% with a projected 11 for future years to 2019-2021 which is overly optimistic given slowing unit trends and the nearly saturated store base (2108 stores vs. 2275 for HD; HD is completely saturated); top line growth is the biggest challenge
3 - Saturation - almost there. Unit growth will likely stay at 2% a year for a while, if that. Other than Canada, the company has exited international operations.
4 - Capital Allocation - the main focus here - buybacks. A lower price is good and higher price bad so this is a trade the ranges stock.
5 - Management - Morningstar thinks they are 'good'. Pay is VERY low for a company this size. Options and RSUs are not relevant.
1 - company is a consistent operator (function of industry and duopoly; Amazon immune)
2 - Margins have room to run - HD consistently runs higher operating margins than Lowe's. HD finished 2015 at 15.1% while lowe's is at 11.8%. Sans Rona, operating margins were up ytd thru Q2. Rona (CAD acquisition) runs at much lower margins than LOW and in theory could be improved (time will tell)
3 - Capital Allocation - buybacks, buybacks, and more buybacks. Rona was a one-time event most likely. CapEx will stay low and FCF will be used for mostly buybacks.
4 - Valuation. It isn't expensive on a trailing basis. It isn't expensive on a future basis. It isn't exciting, but not much is in this market IMO.
1 - Debt on the BS. It continues to grow - LTD was 7b in 2011 and projected 14b this year. Given FCF, nobody cares, esp. for a stalwart. Valuation should center on the PE ratio given the consistency.
2 - CFFO is outpaced by investing activities and financing. I don't know why companies do this - it doesn't impact the valuation - but is entirely voluntary and nobody cares. See WMT for another stock that does this and nobody cares.
3 - Rona Unknown. The purchase of this chain was greeted by a immediate drop in the stock price to the 52 week low (a great time to buy) but it was only 2.4b USD to buy and is pretty much irrelevant to this 68b in sales company.
4. Valuation Range. This was my original issue (higher to low than high) but with a muted comp in Q2 which the company said was due to pull-thru in Q1 (logical enough, but why people trade a stock based on Q2 vs. the 1H is beyond my understanding) but isn't one anymore. The stock has come down significantly after Q2 (HD too). This is likely due to fears of housing, fears of our presidential candidates, fears of rising rates, fears of slowing housing growth, fears of income inequality, fears of the Miami Dolphins almost losing to Cleveland, and fears of you name it here: ________________________________
In the end, I like this business and think it trades for a reasonable price. it is very liquid, you can keep buying if it does go down (say, on a muted comp in Q3), and you can hold it with confidence for 3 to 5 to 10 years if you want. I own this and will add incrementally for each $1 it falls. I would sell incrementally for now as it reached beyond $80.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise do not hold a material investment in the issuer's securities.
- better comp in Q3
- one happy housing report
- inevitable rotation to a great biz at reasonable price