Shares of Lowe's Companies, Inc. (LOW) have declined 15% from their 52-week high of $32.29 in May 2012. At $27.45 per share, the stock is trading at 14.6x the NTM earnings and has a decent dividend yield of 2.4%. I believe the recent plunge has created a beautiful buying opportunity for this must-own quality dividend stock. In this article, I will dwell on five reasons that support my bullish view.
1. Lowe's valuation is reasonable relative to its growth potential. Consensus estimates predict LOW's revenues, EBITDA and EPS to rise by a solid 2-year CAGR of 1.9%, 3.2%, and 24.8% over the current and next fiscal years. Accounting for the decent earnings growth, the stock trades at a reasonable PEG of 0.9x. It is noted that Home Depot (HD) is trading at 1.2x PEG, despite having a lower 2-year EPS CAGR at 16.7%.
2. Lowe's is priced attractively to the company's solid fundamentals (see table below). I have performed a comparable value analysis includes Home Depot and Rona as LOW's comparable peers. In terms of growth prospects, LOW has a lower 2-year estimated CAGR for revenues and EBITDA, but its EPS growth is significantly higher than the two peers' average. On the profitability side, LOW has a decent performance as almost all of the company's profitability metrics are higher than the two peers' averages. In addition, LOW's liquidity condition is fairly comparable to that of the peers. All of the relevant metrics are mostly in line with the peer averages.
As such, I believe LOW should be at least trading on par with the two peers. Assuming no valuation premium or discount to Home Depot and RONA's five trading multiples - EV/Sales, EV/EBITDA, EV/FCF, P/E, and P/S, the estimated stock price is calculated to be $32.07 by equally weighting the valuations determined by each of the five peer average multiples, suggesting a 17% upside from the current stock price at $27.45 (see table above).
3. LOW's dividend yield at 2.4% is currently the highest compared to that of Home Depot and RONA. Since 2003, LOW has been raising dividend annually at a significant 10-year CAGR of 28.7% (see below), reflecting management's strong commitment to return capital to shareholders. The company also awards shareholders with a sizable share buyback programs. Over the past three fiscal years, LOW has repurchased shares with a value of approximately $6.1B (see below).
4. In addition to a strong commitment of returning capital, the company also appears to have ample cash flows to raise dividends down the road. The chart below shows that LOW's annual FCF has been substantially improved since 2010. Since then, the annual dividend payment only represents less than a quarter of the FCF generated, suggesting an ample room for a significant dividend hike in the future.
5. On a technical perspective, the current stock price looks even more attractive. The chart below shows a pattern since 2009 that when the stock had successfully established a ground above its 50-day simple moving average, an upward price momentum would follow and last for a while. After the recent plunge, it appears the stock has been testing the 50-day SMA and trying to break through. I believe once a solid ground is established above the 50-day SMA, a similar pattern would play again - an upward price movement.
Bottom line, LOW stock's risk and reward profile looks very favorable. In the light of the solid and sustainable dividend yield, I strongly recommend acquiring shares at the current price.
Technical price chart is sourced from Capital IQ, all other tables are created by author, and all financial data is sourced from Capital IQ and Morningstar.
Disclosure: I am long LOW.