My investment theme with Lowe's (NYSE:LOW) for several months now was that the valuation was stretched too far. The home improvement retailer proved me wrong with the Q1 results and the stock surged to new highs.
The stock broke above previous highs today and traded up to $79. Congratulations to those that still own the stock, but now is the time for more research instead of a celebration dance.
Most of the market knows that Lowe's has a stretched valuation. Some would even suggest that the retailer is priced for perfection now, trading at 19.2x EPS and updated EPS estimates for this year at $4.11.
After all, the stock is barely hitting new highs by crushing Q1 comp sales numbers. Lowe's reported an incredible 7.3% increase in the crucial U.S. comps to finally top rival Home Depot (NYSE:HD). One has to wonder if that tips off some competitive pressure from the industry leader.
Despite the big Q1 numbers, Lowe's basically stuck to the previous targets for 2016. Excluding sales for the 53rd week, the home improvement retailer only expects roughly 4.5% sales growth. The company forecasts comp sales for the year of 4.0%.
Lowe's might be under-promising in order to over-deliver, but the company is forecasting considerable sequential slowdowns for the year to average almost half the Q1 growth rate. This guidance definitely backs the theory that a warm spring brought forward Q1 sales.
One of my previous reasons for hesitating on Lowe's was the shrinking capital return plan. The last article highlighted how Lowe's was spending the same amount on stock buybacks as when the stock was significantly lower in 2012. In addition, the company is focused on buying and now integrating RONA (OTC:RONAF) in a deal expected to close on May 20.
The good news is that Lowe's spent $1.2 billion on stock buybacks during Q1 when the stock declined. The bad news is that the amount was similar to the levels spent in the same period last year when prices were higher. The end result is that the net payout yield (net stock buyback yield plus dividend yield) will push towards the lowest levels over multiple years.
LOW data by YCharts
The key investor takeaway is that the story hasn't changed or really improved in the last few months. Lowe's is still priced for perfection, and luckily for investors, the company produced a near perfect Q1. As the weather and valuation turns against the home improvement retailer, the market isn't likely to be as kind to the stock.
If you own Lowe's, keep riding the stock higher. The recommendation though is to look for a point to exit the position and lock in those gains.
Disclosure: I/we 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.
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