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Stock Analysis: Lowe’s Companies, Inc. (LOW)

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February 02, 2009 – Comments (3) | RELATED TICKERS: LOW

Linked here is a detailed quantitative analysis of Lowe’s Companies, Inc. (LOW). Below are some highlights from the above linked analysis:

Company Description: Lowe’s Companies, Inc. and its subsidiaries operate as a home improvement retailer in the United States and Canada. The company offers a range of products and services for home decoration, maintenance, repair, remodeling, and property maintenance.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price

2. 20-Year DCF Price

3. Avg. P/E Price

4. Graham Number

LOW is trading at a discount to all four valuations above. If I exclude the high and low valuations and average the remaining two, LOW is trading at a 39.5% discount. LOW earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%

2. Dividend Growth Rate

3. Years of Div. Growth

4. 1-Yr. > 5-Yr Growth

5. Payout 15% of avg.

LOW earned three Stars in this section for 1.), 2.) and 3.) above. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (1999-2002, 2000-2003, 2001-2004, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. LOW has paid a cash dividend to shareholders every year since 1961 and has increased its dividend payments for 46 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1.NPV MMA Diff.

2. Years to >MMA

LOW earned one Star in this section for 1.) above. The NPV MMA Diff. of the $19,636 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as LOW has. If LOW grows its dividend at 20.0% per year, it will take 7 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 3.45%.

Other: LOW is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. The the home improvement retail industry tends to be very cyclical and relies on economic growth. However, LOW is a strong player with opportunities for growth both domestically and abroad. Aging homes and relatively high home ownership rates are powerful long-term demographic drivers that should help mitigate the continued weakness in residential construction. Consumers viewing their homes as investments will continue to spend money on home improvement projects. Risks include a continued decline in the economy, a large rise in long term interest rates and failure by LOW to execute expansion strategy.

Conclusion: LOW earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a net total of five Stars. This quantitatively ranks LOW as a 5 Star-Strong Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $35.98 before LOW’s NPV MMA Differential fell to the $3,000 that I like to see. At that price the stock would yield 0.92%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is 13.6%. This dividend growth rate is substantially below the 20.0% used in this analysis, thus providing a margin of safety.

LOW has an S&P Quality Ranking of A+ from its consistent historical earnings and dividend growth. It has held up much better than its chief rival Home Depot (HD). I have followed LOW for some time, but have been hesitant to initiate a position in a cyclical company with such a low dividend yield. I calculate LOW’s buy price at $33.11. For additional information, including LOW’s dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in LOW (0.0% of my Income Portfolio) .

What are your thoughts on LOW?

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3 Comments – Post Your Own

#1) On February 02, 2009 at 8:17 AM, cubanstockpicker (21.04) wrote:

I see where you point out Lowes better position compared to HD. The problem right now is the sector also where any news of Behemoth HD needs to close their Expo stores and they keep reporting larger layoffs. I am guessing March, April would be a good entry point.

Every Joe The Plumber is now making small but smart purchases at the bottom being bought at Auction prices of .40 on the dollar and less should start offering a mild boost to purchasing of basic building materials to fix up these bargain base homes.

But, I would still wait a bit more. If HD goes the way of Builders Square then Lowes is a two hands buy all the way.

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#2) On February 02, 2009 at 10:07 AM, Mary953 (75.77) wrote:

In a consumer oriented company, my research starts and ends with the product; in this case, with the store.  If I do not like the shopping experience, I will not proceed to the overall market picture or to the specific financial indicators of the company.  There is no need.  If I do like the company on a personal level and the company and stock market do not cause me undue concern (and, at the moment, all things are relative), I return to the specifics, this time with an eye to the competition.  When Lowes was competing with Ace Hardware stores and local Mom-and-Pop hardwares, I would not have gotten past the first step.  Home Depot forced Lowes to improve or perish.  At this point, Lowes has improved in quality, variety of services, web ease of use, returns, variety of styles within given categories (more types and styles of lighting, flooring, cabinetry, etc) and enough other features that Lowe's has replaced long time favorite, Home Depot, with our family.  Within this family, that includes homes built in the 1940's, '50's, 60's, 80's, and 90's.  All homes have at least one DIY'er in residence, but Lowe's also provides installers and warranties for installed work.  Lowe's could probably be a good fit for my portfolio.

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#3) On February 03, 2009 at 11:31 AM, Mary953 (75.77) wrote:

We have had a bunch of new people, new questions, and a few really great additions for the blog that shows new CAPS members how they can use the site, so today, I am redoing the post with the extra information and

YOU HAVE A BLOG FEATURED AS A GOOD WAY TO USE THIS SITE!

I appreciate the information on Lowe's, BTW, as my earlier comment shows.  Thank you for the work you did to put it together.  As to the 'newcomer blog', if you want to mark it for your "following" section, here is the link - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=139616&t=01007737217973478225

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