Lowe’s with Nobias Machine Learning: Should Investors Buy The Recent Dip?
Few companies in the world have benefitted from the COVID-19 pandemic more than Lowe’s (LOW). I have to admit, writing that sentence seemed odd...you’d think that during a global pandemic, the big winners would be in the healthcare space, right? Well, it turns out that from an earnings growth standpoint, very few companies (especially in the large cap space) performed better than Lowe’s over the last 18 months or so. The social distancing regulations put into place throughout the U.S. during 2020 and the stay-at-home/from-from-home trends that developed because of them turned out to be a major boon for Lowe’s operations.
During Lowe’s prior fiscal year, the company posted 24.2% revenue growth. And, more impressively, during fiscal 2021, Lowe’s generated earnings-per-share growth of 55%. Last year, the company’s omni-channel approach to sales really took off with Lowes.com posting 111% year-over-year sales growth. During its most recent fiscal year, Lowe’s generated $9.3 billion in free cash flow and returned $6.7 billion to its shareholders via dividends and buybacks.
In a recent article, Nobias 4-star rated analyst, Eric Volkman, who writes for The Motley Fool, touched upon these strong cash flows, saying, “Best of all for dividend devotees, free cash flow more than tripled to nearly $9.3 billion, providing that much more space for shareholder payouts.” While many companies were cutting their dividends, LOW announced a 9.1% dividend increase during August of 2020. Then, less than a year later, in May of 2021, the company announced that it was increasing its dividend by another 33.3%.
Jason Fieber, a Nobias 5-star rated analyst who publishes reports on Dailytradealert.com, recently covered the stock, writing an article with a specific focus on the company’s dividend growth. Referring to Lowe’s, He said, “This stock is a king among Aristocrats – it’s been increasing its dividend for 59 consecutive years. That time frame spans wars, recessions, terrorist attacks, and even a recent pandemic. But Lowe’s kept on pumping out their growing dividend. That’s the kind of resiliency you want in your investments.”
In December of 2020, Lowe’s announced that its board of directors had authorized a $15 billion share buyback program as well. This added to the existing $4.7 billion buyback authorization that the company had in place, pushing its buyback potential up to nearly $20 billion. And, the strong fundamental growth that LOW shares delivered during the pandemic period aren’t expected to end in the near-term. The housing market remains very hot. Interest rates remain low, yet commodity inflation and a lack of skilled workers in the construction space has resulted in a supply shortage in the housing space. The increased demand, alongside higher than average savings rates created by government stimulus programs, has inspired builders and DIY homeowners alike to embark upon construction/renovation projects that continue to drive Lowe’s sales.
In his article, Volkman wrote,“Even with the pandemic now waning throughout the U.S., that home improvement/new home buying push doesn't seem to be fading away. As a result, Lowe's is sticking to the guidance it offered last December, in which it forecast 22% year-over-year growth in total sales for 2021, despite an anticipated drop in per-share net profit to $7.53 to $7.63 (2020 result: $7.77). It remains a compelling investment.” This net profit figure that Volkman is referring to is the GAAP figure associated with LOW shares. On a non-GAAP basis, the consensus earnings-per-share estimate that Wall Street analysts have for LOW right now in the company’s current fiscal year is $11.03/share.
If Lowe’s is able to meet analyst expectations, this $11/share earnings figure wil represent 24% year-over-year growth. 24% growth on top of a 55% growth year means that during a period of just 2 years, LOW is expected to nearly double its bottom-line results (from $5.72 in fiscal 2020 to $11.03 in fiscal 2022). And, while this level of growth is abnormally high for the company, driven, in large part, by the unique social circumstances created by the COVID-19 pandemic, the company’s growth trajectory remains on a very steep upwards slope.
LOW recently reported Q1 earnings, which Value Investing News, a Nobias 5-star rated analyst, covered at valueinvestingnews.com. Breaking down the earnings report, the analysts said, “Lowe's Cos' revenue increased 27 percent over the past trailing twelve-month period versus the previous twelve-month period. Gross margins increased to 34.01% for the first quarter compared to the same period in the previous year, and operating margins increased to 13.29% over the same period. Net earnings for past trailing twelve months were $6790.0 million, up 49% from the prior year.”
Value Investing News continued, writing, “Moving on to the balance sheet, Lowe's Cos' cash levels jumped 12% for the first quarter over the same period last year. Overall liquidity of the balance sheet, as measured by the current ratio, decreased 2.1% this past year. The current ratio for Lowe's Cos now stands at 1.17. The company decreased shares outstanding by 5.3%.”
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.
Lowe’s beat Wall Street’s estimates on both the top and bottom lines during its recent Q1 report, which marked the 5th consecutive quarter that the company achieved that feat. LOW shares have become known for generating reliable double digit growth, in terms of both earnings-per-share and total returns, in the short-term. However, looking at the stock through a longer-term lens, Fieber shows that LOW has been treating its shareholders very well for decades.
In his bullish article, Fieber highlighted the long-term shareholder returns that LOW shares have generated saying, “So if you had invested only $5,000 into Lowe’s in 1991 – that’s 30 years ago – that $5,000 would have compounded at an annual rate of 24.1% and turned that single $5,000 investment into more than $3 million.” Right now, the average price target provided by 4 and 5-star rated analysts tracked by our algorithm for LOW is $230.17/share.
Today, LOW shares trade for $195.75, having fallen more than 8.2% from their 52-week highs set back in May. With Lowe’s historical performance in mind, combined with the recent dip that we’ve witnessed, we weren’t surprised to see that 88% of Nobias-rated credible authors have a bullish outlook on shares. Looking at the average price target provided by the blue chip analysts that we track, it appears that this dip has created an attractive buying opportunity. That $230.17/share price target implies 17.6% upside potential. And, that doesn’t include Lowe’s 1.64% dividend yield. With the dividend in mind, it appears that LOW has upside potential of nearly 20%.
Disclosure: Nicholas Ward is long 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.