Lowe's Companies, Inc. (LOW)

Hoglum (95.42) Submitted: 11/02/06 3:03 PM : Start Price: $28.64 LOW Score: -3.59

I believe Lowe's will outperform the S&P 500 over the next several years for a couple reasons. First, it currently seems relatively cheap at around $29.00/share. The S&P 500 has an average P/E is 16.54 and P/Cash Flow of 10.84 while Lowe's has 15.13 and 9.26 respectively. I believe this discount has been a product of fear concerning the housing correction. Perhaps the sales stagnation/decrease will be realized, but I'm betting it won't be severe for Lowe's. Next, their sales have been growing around 18%, with higher earnings growth of 28%. The earnings growth outpaces the S&P 500's 3 year average of around 24% by 4%. Even if the sales stagnate some, the discrepancy between sales growth and earnings growth suggests management is effective in leveraging each dollar they obtain into increased profits. This can ease the pain some if the slump turns brutal. Last of all, this company pays a small but growing dividend. The dividend yield is a mere .68% but is growing at a rate of 37.5%. I believe they can, and will, keep this up because their payout ratio is only 6.97%. If the stock price dips and sales take a hit, they still have plenty of room to increase this dividend and Fools such as ourselves can purchase more shares at a cheaper price. This housing thing can't last forever, right?

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