Analysts' Choice: Feel At Home With Lowe's

4/24/2017


  Recent Price
$82
  Dividend
$1.40
  Yield
1.7%
  P/E Ratio
21
  Shares (millions)
868
  Long-Term Debt As % Of Capital
69%
  52-Week Price Range
$84.00 - $64.87

Lowe's ($82; LOW) offers an attractive way to gain retail exposure at a time when online competition plagues many pockets of the industry. Two factors work in Lowe's favor. First, consumers still prefer to buy home-improvement products in person. Second, the unwieldy size of much of the merchandise lining Lowe's shelves has made shipping costs too onerous for Amazon.com ($899; AMZN) to become much of a threat.

Boosted by the robust housing market, Lowe's enjoyed broad growth across all U.S. regions last year. Rising prices and higher transaction volumes should support continued growth in the coming year. Lowe's, already a Long-Term Buy, joins the Buy List this week. The stock yields 1.7%.

Competitive focus

Lowe's operates more than 2,100 home-improvement stores in North America. The company made an aggressive push into Canada with its $2.4 billion acquisition of rival retailer Rona in May 2016. But the U.S. remains Lowe's primary market, accounting for 94% of revenue. The company holds an estimated 8% share of the U.S. home-improvement market, which has grown at an annualized rate of 6.5% over the past three years.

Unlike Home Depot ($147; HD), Lowe's mostly focuses on do-it-yourself customers, who tend to make smaller purchases than professionals. That strategy has contributed to Lowe's generating slower same-store sales growth than its closest competitor in recent quarters. Still, Lowe's consistent growth remains remarkable — it's one of just 10 S&P 1500 retailers to grow same-store sales in each of the past 15 quarters.

At 21 times trailing earnings, Lowe's trades at a 10% discount to Home Depot. In the past decade, the two stocks have typically traded in line with each other based on trailing P/E ratios. Lowe's per-share profits are projected to rise 16% in fiscal 2018 ending January, ahead of Home Depot's estimated growth of 12%.

A long runway for more growth

Recent surveys signal homeowners are increasingly willing to tackle remodeling projects in their kitchens and bathrooms. Growth in disposable income is also projected to outpace gross domestic product in the next few years — a sign that homeowners will have the financial flexibility to keep taking on these projects.

In updating its long-term outlook in December, management projected annual revenue growth of 4% through fiscal 2019. The bulk of that growth will likely come from same-store sales, projected to increase 3.0% to 3.5%. The Rona deal and new-store openings will play a far smaller role.

Operating cash flow is projected to total $18 billion over the next three years, up from $15.3 billion generated in the past three years. With capital expenditures expected to amount to just $3.6 billion in the next three years, Lowe's forecasts $10 billion for share repurchases and $4 billion on dividends. The company has raised its quarterly dividend at an annualized rate of 20% over the past five years and targets 15% to 20% growth in each of the next three years.

An annual report for Lowe's Cos. is available at 1000 Lowe's Blvd., Mooresville, NC 28117; (704) 758-1000; www.lowes.com.

LOWE'S
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jan '17
0.86
vs.
0.59
19%
76.46
-
64.87
21 - 17
Oct '16
0.88
vs.
0.80
10%
82.68
-
66.38
23 - 18
Jul '16
1.37
vs.
1.20
5%
83.65
-
74.56
24 - 22
Apr '16
0.87
vs.
0.70
8%
77.63
-
62.62
24 - 19
           
Year
(Jan.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2017
65.02
3.99
1.26
83.65
-
62.62
21 - 16
2016
59.07
3.29
1.02
78.13
-
64.22
24 - 20
2015
56.22
2.71
0.82
71.11
-
44.13
26 - 16
2014
53.42
2.14
0.68
52.08
-
35.86
24 - 17
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
96
86
70
95
57
78
69

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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