LOW with Nobias technology: After 61% Gains in 2021, Is Lowe’s Still A Buy?
The home improvement section has been on an absolute tear during the last couple of years, due to the strong housing market and the stay-at-home economy created by the COVID-19 pandemic (millions of people had to build home offices and even if you didn’t, if you’ve been stuck at home because of COVID protocols, a renovation might have been top of mind). The home improvement space is largely dominated by two retailers: Lowe’s (LOW) and Home Depot (HD).
Both of these stocks were big winners during 2020, with Home Depot posting gains of 22.2% and Lowe’s posting gains of 33.7%. Both companies saw that bullish momentum pour into 2021 as well, with Home Depot rising another 56.2% and Lowe’s gaining 61.04%. Both companies are highly sought after because of their market-beating returns (for comparison’s sake, the S&P 500 was up approximately 16% in 2020 and 27% in 2021); however, during the last couple of years, it’s clear that Lowe’s in the top performer.
Since LOW recently posted its Q3 earnings data, we wanted to take a look at this stock to see whether or not the credible authors and analysts tracked by the Nobias algorithm believe that the stock’s positive trajectory is likely to remain in place as we head into the new year. In short, according to the Nobias community, is LOW a buy here trading near all-time highs? Let’s find out.
LOW Dec 2021
In a recent Motley Fool podcast, Nobias 5-star rated author, Brian Withers and Nobias 3-star rated analyst, Parkev Tatevosian had a discussion regarding LOW’s recent earnings report. Tatevosian highlighted the top and bottom line results saying, “This morning, Lowe's reported Q3 revenue came in at $22.9 billion, which handily beat estimates of $21.7 billion, up about 3% year over year. Earnings per share $2.73, also beating estimates of $2.30, and up almost 40% year over year.” He continued, “The results were good enough to get management to raise the outlook for the rest of the year. They now expect revenue of $95 billion, that's up from the previously expected $92 billion.”
Withers touched upon the year-over-year same-store-sales comparison growth that Lowe’s posted, saying, “Yeah, I looked up the same-store comps. They weren't as high as Home Depot's. They came in at 2.2%. But as I remember this same quarter last year, their comps were astounding. They had U.S. sales comps of 30%, so that 2% is on top of a 30% from a year ago. Even though it doesn't sound super-impressive, it's building on the momentum from last year, and I think investors should be excited about that.” Tatevosian concluded the conversation, echoing Withers’ bullish point, “For this year to be growing on top of that is what's really impressive for Lowe's.”
Madeleine Johnson, a Nobias 4-star rated analyst, also recently highlighted her bullish outlook on Lowe’s in an article at Zack’s. She began by touching upon the same store sales growth as well, saying, “Comparable store sales increased 2.2% year-over-year, with inflation and big-ticket sales (like appliances and flooring) resulting in a 9.7% increase in the average ticket.” But, as she points out, it wasn’t just revenues that were increasing, but also operational efficiency as well. Johnson wrote, “Operating margin expanded 240 basis points to 12.2%”.
Johnson quoted Lowe’s CEO, Marvin Ellison, who touched upon the increased demand for home renovation projects during the pandemic period in the Q3 conference call when he said, “After Labor Day, we saw an increase in DIY demand on the weekends as travel activity slowed down and children returned to school. As a result, consumers were once again spending more time on projects in their homes.” Johnson added, “Management expects these sales trends to continue into Q4 now that the weather is getting colder and people are spending more time at home.”
Looking ahead to Q4 and therefore, full-year 2021 results, Johnson said, “For fiscal 2021, 12 analysts have revised their bottom-line estimate upwards in the last 60 days, and the Zacks Consensus Estimate has moved up 62 cents to $11.91 per share. Earnings are expected to jump more than 34% compared to the prior year period.” She continued, touching upon the increasingly bullish sentiment surrounding Lowe’s looking into the new year as well, saying, “Fiscal 2022 looks strong too; 12 analysts have upped their outlook as well, and our consensus estimate has increased 78 cents to $12.60 per share.”
Johnson shed light on the fact that Lowe’s isn’t just providing shareholders with strong capital gains, but also, reliably increasing passive income. She wrote, “Plus, Lowe’s is a Dividend King, having raised its dividend for 59 straight years.” She concluded her report by doubling down on the idea that the pandemic has created a new-normal environment, centered around the consumer’s home, saying, “Even throughout this year’s economic reopening, it’s become clear that the home is now an even more essential place for people; we're still choosing to exercise at home, entertain at home, and work from home, and this kind of consumer behavior will only continue to benefit companies like Lowe’s.”
Nobias 4-star rated author, Kody Kester, recently provided his take on the Q3 report at The Motley Fool. In his bullish piece, Kester highted not only Lowe’s dividend growth results (also noting that it is a Dividend King) but also the company’s strong stock buyback as well. He wrote, “Management has been aggressively repurchasing shares too, which explains the staggering 8.2% year-over-year reduction in its weighted-average share count. When factoring in the company's higher revenue base, improved margins, and lower share count, it makes sense Lowe's was able to grow its non-GAAP diluted earnings per share (EPS) 37.9% to $2.73.”
On December 15th, Lowe’s provided investors with its fiscal 2022 outlook, which not only touched upon continued growth prospects, but also, more share repurchases. The press release read: “Based on its confidence in the company's continued growth trajectory and cash flow generation capabilities, the Board of Directors has authorized a new $13 billion common stock repurchase program. This new repurchase program has no expiration date and adds to the previous program's balance, which was $7.3 billion as of December 14, 2021. The company now has total share repurchase authorization of approximately $20 billion” With this in mind, it’s likely that the continued reduction of LOW’s outstanding share count will help bolster earnings-per-share growth moving forward into 2022 (just as it has in 2021).
In Kester’s article, he highlighted Lowe’s balance sheet data, showing that these strong shareholder returns (both in the form of dividends and stock buybacks) are sustainable, fundamentally. Regarding the balance sheet, Kester wrote, “Lowe's has $18.56 billion in net debt, and it generated $13.61 billion in trailing-12-month earnings before interest, taxes, depreciation, and amortization (EBITDA). This equates to a net debt-to-EBITDA ratio of 1.4, which is well within the acceptable range for a retailer of this scale.”
And, with specific regard to dividend safety and future dividend growth potential, he said, “And based on analysts' estimates for earnings of $11.94 per share this year against a dividend payout of $2.80 per share, Lowe's payout ratio of 23% leaves plenty of room for the dividend to sustain its decades-long growth streak.” Kester was also bullish on the company’s continued success in the eCommerce arena. He wrote, “And the company has positioned itself well in the age of e-commerce, as evidenced by the fact Lowe's.com sales were up 25%. This came on top of the 106% sales growth for Lowes.com in the same quarter last year.” He concluded his article putting a spotlight on Lowe’s valuation.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
One might assume that after 33.7% gains in 2020 and another 61.04% gains in 2021, that Lowe’s stock would be expensive at the end of 2021, trading near all-time highs. However, as Kester points out, that’s not the case. He said, ‘Lowe's forward price-to-earnings ratio of about 19 comes in below the home improvement retail industry's average of 24. With earnings growth expected to outpace the industry over the next five years as well, Lowe's and its 1.3% yield are an attractive buy for dividend investors.” How is this possible? Well, in short, LOW’s bottom-line growth rate has matched its share price appreciation during the recent rally.
In 2020, LOW’s earnings-per-share grew by 55%. And, in 2021, LOW’s EPS is expected to increase another 35% on top of that (using the current analyst consensus for 2021 full-year results). As Kester notes, LOW is currently trading for approximately 19x forward earnings estimates. Lowe’s 20-year average price-to-earnings ratio is 19.9x. Therefore, it’s reasonable to assume (looking at historical data) that shares continue to trade in a fair value range. And, it appears that the blue chip (4 and 5-star rated) Wall Street analysts that we track with the Nobias algorithm agree.
Right now, the average price target being applied to LOW shares by this cohort of analysts is $279.88. LOW’s current share price is $258.48. This implies that LOW shares are slightly undervalued, offering upside potential of approximately 8.2%. And, looking at the community of credible authors that we track, the sentiment surrounding LOW shares is even more bullish. Right now, 88% of the reports recently published by 4 and 5-star rated authors have expressed “Bullish” sentiment.
Therefore, when looking at the aggregate analysis provided by the credible analysts/authors that we track, it appears that it’s not too late to accumulate LOW shares and take advantage of this new normal at-home environment.
Disclosure: Of the stocks mentioned in this article, Nicholas Ward is long both HD and LOW shares. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.