Lowe's (LOW) has been one of the strongest large caps recently and just set new 52 week highs of $27.57. However, market optimism is not borne out by the valuation metrics or analysts. In this article, I take a critical review of Lowe's from an investment perspective.
The stock has had an up and down year. The stock was steady in the beginning part of last year but then quickly collapsed, falling more than 30% to August lows of $18.07 a share. Then it stablized in late summer and early fall and began a strong rally to its current price of about $26 a share. The stock is above its 200 day moving average, which sits at just over $22, and its 50 day moving average, which sits at just above $24. The stock looks extended as it is way above its 50 day moving average and may be due for a pullback. The $27 level that Lowe's just crossed should still serve as a key resistance level as the stock tried to cross that price level nearly a year ago but failed multiple times. On the downside, $24 should serve as a strong support level.
Lowe's trailing 5 year valuation metrics suggest that the company is fairly valued to slightly undervalued as they are all at or above their 5 year averages. Lowe's current P/B ratio is 2.0 and it has averaged 2.0 over the past 5 years with a high of 3.3 and a low of 1.5. Lowe's current P/S ratio is 0.7 and it has averaged 0.7 over the past 5 years with a high of 1.1 and a low of 0.5. Lowe's current P/E ratio is 19.2 and it has averaged 15.8 over the past 5 years with a high of 22.1 and a low of 11.6.
The forward valuation does not contradict this. Lowe's is currently trading at $27.46 a share and analysts expect the company to report earnings of $1.78 per share next year for a forward P/E of 15. Revenues are expected to grow just over 0.5%. Lowe's closest comparison is Home Depot (HD). HD is trading at $44.88 a share with analysts expecting the company to report earnings of $2.74 a share next year for a forward P/E of 16. Revenues are projected to grow 3.4%. Lowe's is trading right around where HD is trading and this metric suggests that the stock is fairly valued.
Analysts agree with the trailing and forward valuation metrics. The consensus price target for the analysts who follow Lowe's is $27. That is downside of 2% and suggests that the stock is fairly valued at these levels with has limited upside.
Notably, analysts seem to have a good sense of Lowe's performance. Lowe's has beat EPS estimates three out of the past four quarters. But in the past three quarters, EPS was no further than 2 cents away from consensus. On a positive note, Lowe's has paid a dividend since 1985. It currently pays a 14 cent quarterly dividend for a yearly total of 56 cents. This equates to an annual yield of 2.1%. The last time the quarterly dividend was increased was in 2011 when the company increased the dividend 27% to 14 cents a share from 11 cents a share. Notably, the dividend has nearly tripled since 2007.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.