ModernGraham Valuation: Lowe’s Companies (LOW)

moneyCompany Profile (obtained from Google Finance): Lowe’s Companies, Inc. (Lowe’s) is a home improvement retailer. As of February 3, 2012, Lowe’s operated 1,745 stores, consisted of 1,712 stores across 50 United States, 31 stores in Canada and two stores in Mexico. Its 1,745 stores represent approximately 197 million square feet of retail selling space. The Company serves homeowners, renters and commercial business customers. Individual homeowners and renters complete an array of projects and vary along the spectrum of do-it-yourself (DIY) and do-it-for-me (DIFM). Commercial business customers include those who work in construction, repair/remodel, commercial and residential property management, or business maintenance professions. During the fiscal year ended February 3, 2012 (fiscal 2011), it opened 25 stores, which included the relocation of two existing stores. Seven of the stores were opened in Canada. In August 2013, the Company acquired the majority of assets of Orchard Supply Hardware, including 72 Orchard stores.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $20.33
MG Opinion Overvalued
Value Based on 3% Growth $25.04
Value Based on 0% Growth $14.68
Market Implied Growth Rate 9.31%
NCAV -$8.87
PEmg 27.12
Current Ratio 1.17
PB Ratio 3.81

Balance Sheet – 7/31/2013 

Current Assets $10,913,000,000
Current Liabilities $9,340,000,000
Total Debt $9,015,000,000
Total Assets $33,408,000,000
Intangible Assets $0
Total Liabilities $20,346,000,000
Outstanding Shares 1,063,000,000

Earnings Per Share – Diluted

2014 (estimate) $2.14
2013 $1.70
2012 $1.44
2011 $1.43
2010 $1.22
2009 $1.49
2008 $1.86
2007 $1.99
2006 $1.73
2005 $1.36
2004 $1.16
2003 $0.93

Earnings Per Share – Modern Graham (Calculating EPSmg)

2014 (estimate) $1.73
2013 $1.50
2012 $1.43
2011 $1.48
2010 $1.56
2009 $1.71

Conclusion:

Lowe’s Companies is not very attractive from a ModernGraham perspective at this time.  The company has failed to adequately grow earnings over the last ten years, has a poor current ratio, and trades at high PEmg and PB ratios.  As a result, it does not pass the requirements of either the Defensive Investor or the Enterprising Investor.  The company has only grown EPSmg (normalized earnings) from $1.71 in 2009 to an estimated $1.73 for 2014, a result that does not even come close to supporting the 9.31% growth rate implied by the market.  It’s likely this company is overvalued right now, presumably because the market expects Lowe’s to do better once the housing market recovers, and it’s true that the company should do better and has shown some improvements over the last few years.  However, value investors should wait to see if the company can prove itself before getting involved in speculating about the future earnings.  After all, value investing is all about fundamental analysis and the fundamentals don’t currently support the market’s implications here.

What do you think?  Is Lowe’s Companies overvalued?  Is the company not suitable for either Defensive Investors or Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Lowe’s Companies at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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