Lowe's - I Remain On Sidelines Despite Operational Improvement And Large Cash Returns

| About: Lowe's Companies, (LOW)

Shares of Lowe's (LOW) rose more than 6% in Monday's trading session. The home improvement retailer reported a decent set of third quarter results before the market open.

Third Quarter Results

Lowe's reported third quarter revenues of $12.07 billion, up 1.9% on the year before. Revenue growth was driven by comparable sales growth of 1.8%. Revenues comfortably beat analysts consensus of $11.92 billion.

Revenues came in surprisingly strong. The 1.8% comparable store sales growth rate came after a 0.4% drop in same store sales in the second quarter.

The world's second largest home improvement retailer reported net earnings of $376 million, up 76% on the year. Earnings per share rose 94.4% to $0.35 per diluted share, in line with analysts expectations.

The company took $85 million in charges related to asset impairments and discontinued projects, which impacted earnings by $0.05 per share. Adjusted, non-GAAP earnings per share rose 11% to $0.40.

Lowe's retired 29.6 million shares for a total consideration of $850 million during the third quarter. For the first nine months, Lowe's repurchased 124.4 million shares for $3.6 billion. The company has already retired roughly 10% of its shares outstanding this year.

CEO and Chairman Robert A. Niblock commented on the results, "We are keenly focused on improving our core business. Our level of execution is improving and we delivered solid results in the third quarter. I would like to thank our employees for their continued dedication and customer focus."


For the full year of its fiscal 2012, Lowe's guides for flat total sales. On a 52 week basis, sales are expected to increase by 2%. Comparable sales growth is expected to increase by 1%.

Lowe's guides for diluted earnings per share of $1.64, for the year ending in February 2013. Analysts expected Lowe's to guide for annnual earnings of $1.66 per share.

Lowe's expects that operating margins will rise some 40 basis points for the year and open 10 stores during the year.


Lowe's ended its third quarter with $1.3 billion in cash, equivalents and short term investments. The company operates with over $9.0 billion in short and long term debt, for a net debt position of $7.7 billion.

For the first nine months of 2012, Lowe's generated sales of $39.5 billion. The company net earned $1.67 billion, or $1.42 per diluted share. At this rate, Lowe's is on track to generate revenues of $51 billion, on which the company could earn $1.9 billion, or $1.64 per diluted share.

Factoring in Monday's gains, the market values Lowe's at $38.7 billion. This values the firm at 0.8 times annual revenues and roughly 20 times annual earnings.

Lowe's currently pays a quarterly dividend of $0.16 per share, for an annual dividend yield of 1.9%.

Investment Thesis

Year to date, shares of Lowe's have risen 34%. Shares quickly advanced from $25 in January to $32 in April on signs of a US housing recovery. Shares fell back to $25 in May after the company lowered its full year outlook. From that point in time shares recovered to year highs of $34 per share as the pace of the US housing market recovery accelerated.

After falling to lows of $14 during the crisis in 2009 shares have more than doubled. Shares are trading around $34 and are approaching all time highs of $35 set before the financial crisis. Between its fiscal 2008 and 2012, revenues rose from $48.2 billion to an estimated $51 billion. Net income fell from $2.2 billion to an estimated $1.9 billion this year, while earnings per share came in unchanged. The company retired some 20% of its shares outstanding during the period, after aggressively buying back shares this year.

Lowe's has shifted to an everyday low price strategy. Furthermore it is thoroughly reviewing its business to improve its assortment and cut on costs, in an attempt to catch up with Home Depot (HD). Last week the largest home improvement retailer published strong results on the back of same store sales growth of 4.2%.

Both retailers benefited from the impact of Hurricane Sandy as home and business owners prepared for the storm. The storm did not impact the comparison as a result of Hurricane Irene in 2011.

The valuation of Lowe's is in line with Home Depot's. Lowe's trades at just 0.8 times annual revenues compared to Home Depot's multiple of 1.3 times. Both companies trade around 20-22 times annual earnings. The reason for the revenue discount for Lowe's is the fact that profit margins are merely 3.7%, while Home Depot reports net income margins of 6.0%. Both companies pay a dividend yield of almost 2%.

Both home improvement retailers offer something for each type of investor. Home Depot offers room for capital gains as it grows the business faster at superior margins. Lowe's is less profitable and grows much slower, but has boosted payouts to shareholders.

I remain on the sidelines, despite the housing recovery. Both companies are trading at reasonably high multiples. Furthermore both companies carry quite a debt load.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.