LOW: Don’t Knock Lowe’s for Lagging Behind Home Depot

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I confess surprise that Lowe’s Companies, Inc. (NYSE:LOW) missed its earnings numbers this quarter even though things have been spectacularly good in the home improvement space.

lowes-low-stock-185Let’s look at the numbers to see what Lowe’s had to say about it all and try to extrapolate buy, sell or hold suggestions.

Lowe’s generated sales of $14.1 billion for the first quarter, up a comfortable 5.4% from $13.4 billion last year, and the comparable-store sales increased a very respectable 5.2%.

Investors should always look carefully at that same-store growth because if a company happens to open up a lot of new stores in a quarter or a year, we would expect to see revenues increase substantially. The same-store metric allows us to judge organic growth — as in, whether more and more consumers are going to Lowe’s compared to the same period last year

The earnings for Lowe’s stock came in at $673 million or 70 cents per share, up from $624 million or 61 cents per share. That’s also a very respectable 15% year-over-year increase, and that 15% number is what I use as the threshold for what I consider a growth stock.

Lowe’s remains in solid financial shape, with the balance sheet showing $1.43 billion in cash and $10.3 billion in long-term debt. Lowe’s debt is accruing interest at an acceptable rate of 5% interest. Cash flow at Lowe’s continues to be exceptional, with $2.48 billion of operating cash flow generated and free cash flow coming in at $2.15 billion.

Now, as good as these numbers are for Lowe’s, they fell short of expectation. Earnings were expected to be 74 cents per share, and revenue came in about $100 million light. What’s going on with Lowe’s, especially considering Home Depot Inc (NYSE:HD) beat earnings?

Two different things appear to be affecting LOW stock. As we know, LOW is a home improvement company. So, wherever the action is happening in the housing recovery is where we would expect a home improvement company to do well.

As it turns out, Home Depot is actually better positioned in terms of locations than LOW, as far as where the strongest housing recoveries are going on — California and Nevada, and a few other states.

Lowe’s said the really severe winter caught it off-guard. Consequently, the length of the winter pushed LOW’s spring promotional period later than usual. Promotions often boost sales because while pricing is reduced, it often gooses increased volume.

LOW stock typically has its big promotional event in the first quarter, but it got pushed into the second quarter because of the weather.

Going forward, however, LOW reiterated its expectations for fiscal year 2015 to be $3.29 per share, up 22% from last year’s $2.70. Personally, if Lowe’s hits that target, you won’t hear me complain. Name other companies growing at 22% year over year in a solid sector with great balance sheet.

What we have now is LOW stock trading at $68.50, which is 21 times fiscal year 2015 earnings, which puts it solidly in the category of growth at a reasonable price (GARP). Considering most growth stocks are trading far above a PEG ratio of 1, I’m thrilled to find one that isn’t. Add in the great balance sheet, world-class brand name and outstanding free cash flow, and I’d even suggest LOW stock is undervalued.

Lawrence Meyers owns HD stock.

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