Lowe's: No Clear Value Here
- Lowe's dips to $110 on weak numbers and the market selloff.
- The net payout yield is now 6.7% and the stock is usually a solid buy up at 8.0%.
- The stock trades at 17x FY20 EPS estimates.
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Despite a relatively consistent growth model, Lowe's (NYSE:LOW) remains a highly volatile stock. My investment thesis warned investors the stock wasn't a hold above $120 following FQ3 results, and the market selloff isn't helping the stock following weak FY20 guidance.
Same Ole Lowe's
Even with a new CEO with a transformation plan to turn the home improvement chain into a digital leader in the space, Lowe's continued a history of missing consensus estimates. For FQ4, the retailer missed revenue estimates by $100 million marking the second consecutive quarter of a big revenue miss.
A big part of the corporate transformation plan by new CEO Marvin Ellison was eliminating a history of missing estimates despite constantly generating positive comps. The last quarter was another prime example where the company had 2.5% comp sales growth while analysts estimates were up at 3.5% due in large part to corporate guidance.
In addition, Lowe's constantly underperforms competitor Home Depot (HD) in the home improvement space. For the quarter ending January, Home Depot generated comp sales of 5.2%, or more than double the 2.5% level of Lowe's.
One can easily argue the same ole Lowe's is starting to re-emerge. The company wants to focus on supply chain transformation, merchandising excellence and operational efficiency, but Home Depot always outperforms them. The latest promise is a new website to help Lowes.com capture more e-commerce sales in comparison to Home Depot.
The company can have a goal of improving order fulfillment and delivery optimization, but Home Depot is the giant in the sector with $115 billion in annual sales while Lowe's is down at only $72 billion. Over the last decade, the revenue gap has only widened and the website updates appear only set to bring the company up to date with competitors.
The value proposition just isn't clear even on this dip to $110. The stock trades at nearly 17x FY20 EPS (ends January 2021) estimates of $6.55 and the company only spent $4.3 billion on share buybacks in FY19 following $3.0 billion in FY18.
The PE multiple isn't cheap here and the company isn't overly aggressive on share buybacks considering the stock valuation of $85 billion. The higher buyback amounts are necessary to account for the higher stock prices towards the end of 2019 for Lowe's to keep up with the share repurchases.
The net payout yield that combines the dividend yield with the net stock buyback yield indicates Lowe's offers a 6.7% yield. The company pays a nearly 2.0% dividend yield with the remaining yield from the net share buybacks.
The chart highlights a stock clearly more reasonably valued back in the 2015 to 2016 time period when the net payout yield regularly topped 8.0%. The company forecasts boosting share buybacks to $5.0 billion this fiscal year while still offering a 2.0% dividend yield.
With a market cap of $85 billion, the net stock buyback yield will approach 5.9%. Combined with the 2.0% dividend yield, the net payout yield would eventually reach 7.9% without any material gains in the stock price.
Clearly, this is the type of yield signal where Lowe's becomes appealing later in the year. First, the company has to actually spend the $5.0 billion on stock buybacks this fiscal year. Second, the stock has to actually hold the current prices so the buyback can repurchase 45 million shares.
The key investor takeaway is don't buy into any hype related to the business transformation. Lowe's still remains a distant second to Home Depot in the home improvement space and nothing has really changed in this regards.
With the market down over 10% from the recent highs, investors can probably find better stocks beaten down substantially. As Lowe's holds the current prices and actually makes some meaningful transformation in their business in comparison to Home Depot, the stock will be reviewed later in the year.
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This article was written by
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