A combination of factors, including fourth-quarter earnings, activist investors and a broken chart, lead me to believe that now may be a good time to nibble on a position in Lowe’s Companies, Inc. (NYSE:LOW).
Let’s start by taking a look at fourth-quarter earnings.
The first number I always gravitate to when I look at a retail operation are comparable same-store sales. Remember, negative comps are absolutely terrible; 0-3% growth is considered fine; 3-5% is considered good. Anything above 5% is considered exceptional.
Comparable Same-Store Sales Growth
LOW stock delivered comps of 4.1%. These positive comps stretched across 13 of the 14 regions covered by LOW stock. They also covered nine of 11 product categories. However, we should note that the 4.1% increase came on the back of a 4.9% increase in average ticket and a 0.8% decline in transactions. That’s not of huge concern. What it tells me is that Lowe’s maintains some pricing power, though the foot traffic appears to be flat.
LOW stock was also kind enough to break out which product categories were performing above average and which were below average. Appliances, lumber and building materials, rough plumbing and electrical, and tools and hardware were all above average. We can’t draw definitive conclusions from this, but these are all bigger-ticket items. They speak to larger work being done on homes. That speaks to a strong economy. In a weaker economy, people are going to do more cosmetic work.
Fundamentals Are Strong
Gross margins are still quite good at 33.73%, although the market didn’t like the fact that those declined by 60 basis points. But of greater concern is that operating margin came in at 7.08% down 97 basis points. That’s one of the things that these new activist shareholders need to tackle.
Otherwise, LOW stock is on pretty solid financial footing with $588 million of cash on hand, operating cash flow of $5.1 billion — just for the quarter — and free cash flow of $3.9 billion. So, while Lowe’s may not be operating at peak efficiency, it is generating tons of cash. This means that there’s room for improvement operationally.
For 2018, the news seems to be generally good, except for the operating margins. LOW stock is projecting total sales increases of 4%, comps of 3.5%, diluted earnings per share of $5.40 to $5.50 and $6.5 billion of operational cash flow.
Net income for the year was $3.447 billion, up about 12% from $3.09 billion. after subtracting out all of the extraordinary items adjusted EPS came in at $4.39. Thus, if next year comes in at $5.45 per share, the year-over-year increase would be well over 20%
Bottom Line on LOW Stock
If we look at a chart of Lowe’s stock, we see it is really taken a tumble from its high, down a little over 20%. With the stock now down at $85.54 per share — and both the 200-day moving average and 50-week moving average at $83.25 — this seems like a good time to get in for a trade. I would set a stop loss at $79 per share.
However, this may also be a time to consider LOW stock as a long-term investment. Lowe’s recently agreed to three new board members put up by an activist shareholder company. These are three highly capable people, including one who served on the board of Home Depot Inc. (NYSE:HD).
When it comes to a market with two dominant players, and a long-term investment horizon, there is generally no bad decision to be made. A look at the legacy oil producers are pretty good example of that. However when a company is beaten-down and seems ripe for turnaround, you can often jump in at a value price that may allow for a higher return on investment over time.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at [email protected].