Lowe's: Welcome Back To Value Territory

| About: Lowe's Companies, (LOW)

Summary

Lowe's continues a recent history of missing earnings estimates.

The home improvement retailer continues to generate solid growth despite the misses.

A more compelling stock valuation exists with the stock down at the lows.

With Lowe's (NYSE:LOW) down about 3% after disappointing FQ3 results, the commentary around the stock is misguided. If one reads the earnings release without knowledge of analyst estimates and the negative stock reaction, the perception of the company might be different.

Back to the lows around $66, investors need to decide if the actual results produced by the home improvement giant is worthy of the current valuation. For those following my previous research on Lowe's, the key is always in the yield.

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History Of Earnings Misses

Lowe's is trading down due a massive earnings miss. Despite reporting a 10% increase in EPS, the market had expected a roughly 20% gain with a analyst target of $0.96.

The key to the investment decision is knowing that Lowe's has a history of missing EPS estimates with four misses since the start of 2015. The more important number is the actual growth rate.

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Source: Seeking Alpha earnings page

The home improvement retailer had earnings of $775 million in comparison to an estimate of around $845 million. The difference is meaningful, but Lowe's still has a sizeable amount of profits and that is a key to the investment decision.

The biggest issue all along was that the stock was priced for perfection and Lowe's had always been a little brother to Home Depot (NYSE:HD) in the sector. For Q3, the later reported comp sales grew by 4.9% while Lowe's only saw 2.7% growth.

The history of spotty results and a secondary position in the sector always questioned why the stock traded at forward P/E multiples of a market dominant player in a fast growth industry. The selloff places the stock in a more attractive position as investors start looking at the potential for Lowe's to earn at least $4.50 next year.

Ultimately though, the company will tell us when the stock is cheap again. The home improvement retailer has a history of large capital returns that when viewed in relation to the market cap tell a key story on value.

Net Payout Yields

For Q3, Lowe's returned $859 million to shareholders with $550 million utilized for stock buybacks. The current dividend yield is now a robust 2% though not as exciting as the bond yields rise.

The net payout yield that combines the yields for net stock buybacks and dividends is more appealing now. The recent dip in the stock has the yield approaching 8% after warning investors the stock was overvalued earlier this year when the yield dipped closer to 6%.

LOW Net Common Payout Yield (<a href=

Lowe's told investors throughout this year that valuation was a question. Despite earnings being up roughly 10% for the year through September, the company has actually spent $300 million less on stock buybacks this year.

Takeaway

The key investor takeaway is that Lowe's is now closer to value territory with the stock trading down to $66. Though, the company needs to signal that value exists due to expected earnings growth over the next few years by ramping up capital returns with the valuation back at more compelling levels.

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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.