"Never stop improving."
That's the new slogan on ads from home improvement retailer
Lowe's Companies, Inc.
). And that's just what the company is striving to do.
Management recently laid out an ambitious plan to earn $3.66 per
share in 2015, up from ~$1.61 in 2011. The company believes it can
get there through solid same-store sales growth, margin expansion,
and share buybacks.
Lowe's is the second largest home improvement retailer in the
world. It operates 1,744 stores throughout North America.
The company is headquartered in Mooresville, North Carolina and has
a market cap of $33.6 billion.
Third Quarter Results
Lowe's reported better than expected earnings for the third quarter
of 2011. Earnings per share came in at 35 cents, beating the Zacks
Consensus Estimate by 2 cents. It was a stellar 21% increase over
the same quarter in 2010.
Sales rose 2% to $11.852 billion, ahead of the Zacks Consensus
Estimate of $11.690 billion. Same-store sales were up 0.7%.
The gross profit margin did contract a bit due to higher input
costs, falling 100 basis points to 34.06%. EPS benefited from a 10%
decline in the weighted average diluted shares outstanding as the
company continues to buy back its stock.
Following its Q4 results, management said that it expects EPS of
$1.57 to $1.60 for the fiscal year ending February 3, 2012.
Also, at its Investor Conference in December, management reiterated
its guidance for 2011 and also laid out an ambitious 5-year
The company stated a target EPS of $3.66 by 2015, which implies a
compound annual growth rate of 24%. Management expects to get there
through average same-store sales growth of 3.5%, margin expansion,
and share buybacks.
This drove analysts to revise their estimates higher, sending the
stock to a Zacks #2 Rank (Buy).
The Zacks Consensus Estimate for 2011 is now $1.61, a penny above
guidance, and 11% above 2010 EPS. The 2012 consensus estimate is
currently $1.79, also corresponding with 11% EPS growth.
Returning Value to Shareholders
Lowe's generates strong free cash flow and has been using that cash
to reward shareholders through stock buybacks and dividend hikes.
The company spent $2.4 billion through the first nine months of
fiscal 2011 buying back shares, for instance.
It currently pays a dividend that yields a solid 2.1%. Since 2000,
the company has increased its dividend at a compound annual rate of
The stock has been on a tear the last several weeks thanks to
somewhat encouraging data on the housing market. But valuation
still looks very reasonable for LOW.
Shares trade at 14.8x 12-month forward earnings, well below the
industry median of 17.3x, and below its 10-year median of 16.0x.
Its price to book ratio of 2.0 is also below the industry multiple
of 2.7 and its historical multiple of 3.1.
The Bottom Line
With rising estimates, strong growth projections,
shareholder-friendly management and reasonable valuation, Lowe's
offers investors a lot of upside potential.
Todd Bunton is the Growth & Income Stock Strategist for
and Co-Editor of the
Reitmeister Value Investor
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