Looking at Lowe’s (LOW)

Lowe’s Companies (LOW) operates a nationwide chain of building materials and home improvement stores in 49 states.  Value Line says that it had 1655 stores in 2007 and, despite the economic downturn, estimates 2025 stores by 2011-13.

 

The slowdown of the economy and the prolonged downturn of the housing market have meant hard times for LOW (as well as for Home Depot).  Value Line’s Industry report observes that people are reluctant to invest in their homes when house prices are falling and are cutting back on discretionary spending as prices rise for food and energy while unemployment continues to grow.

 

LOW’s sales growth has been steadily declining over the past 10 years, and sunk to single digits three years ago.  Sales AND EPS growth have continued to fall: in 2006, Sales and EPS sunk to 5.7% and 3.7% and, in 2007, to a dismal 2.9% and -6.5%.

 

LOW was the subject of the monthly Better Investing Online Stock Study for November.  Don Spindel, a retired investment analyst and a former member of BI’s Board of Directors, led the study which involved about 100 participants making SSG judgments by consensus decision-making.

 

Lowe’s (LOW)	Consensus SSG	Armin-1	Armin-2	Take Stock
Price Date	11-4-08	9-29-08	11-7-08	11-6-08
Study Date	11-7-08	9-29-08	11-8-08	11-6-08
Data	S&P	same	same	Hemscott
Price	$21.60	$22.96	$19.66	same
52 week High & Low Prices	$28.50 & $15.80	$31.72 & $18.00	$28.49 & $15.76	n/a
Project Growth From	last annual	last quarter	same	last annual
Sales Growth	06.00%	14.70%	06.20%	02.80%
EPS Growth	06.01%	09.00%	06.20% (see below)	–05.70%
High PE	17.50	15.0	same	20.9
High EPS	$2.49	$2.71	$2.38	$1.39
High Price	$43.58	$40.70	$35.70	$29.12
Value Line Estimated High Price = $35-50 at $23.62 recent price as of 10-3-08
Low PE	10.00	10.20	same	14.2
Low EPS	$1.86	$1.76	same	$1.75
Low Price	$18.60	$18.00	same	$24.85
Upside/Down	7.27	3.6	9.7	impossible to calculate
Total Return	16.00%	12.4%	13.00%	-15.9%
SSG Buy Under	n/a	n/a	$17.99	$15.41
RV/PRV (outliers out)	n/a	n/a	66.7/62.6 (1 yr out)	n/a
RV/PRV (no outliers)	n/a	n/a	63.6/64.3	n/a
Quality	n/a	n/a	A+	TS = 1.1, un-acceptable
PTPM – 5 yr ave	9.96% trend down (by eyeball)	10.00% trend down	same	same
ROE – 5 yr ave, End Equity	18.20% trend down (by eyeball)	18.20% trend down	same	n/a
ROE – 5 yr ave, Start Equity	n/a	n/a	26.1% trend down	21.1% trend n/a
Debt to Equity – 5 yr ave	n/a	n/a	29.8% trend up	n/a

 

Consensus SSG:

 

– I found it disappointing that the choices offered for Consensus decision-making all included the company’s 10 year and 5 year historical performance which seem irrelevant today given the declining trends in Sales and EPS growth as well as in High and Low PEs.

 

– For example, participants were asked to choose from 5 choices for future Sales growth: last 10 years (17%), last 5 years (13%), last 3 years (10%) and Value Line’s estimated Sales per Share for the next 3-5 years (6%).  It’s not surprising that 64% choose the smallest rate.

 

– Participants also chose the same 6% rate for future EPS growth from five choices: management’s forecast (15%), EPS growth last 3 years (11%), same as Sales growth choice (6%), and VL’s estimated EPS for the next 3-5 years (1.5%).

 

–  VL does not make an explicit estimate of future Sales growth so the Consensus was offered the choice of using VL’s Sales per Share estimate.  That choice seems misguided as Sales/sh is not the same as Sales growth. I think it is more appropriate to imply a rate from VL Sales data and get 4.49% Sales growth which is much less than the 6.00% the Consensus chose. 

 

– To imply a rate from VL data, I applied VL’s methodology which is explained in its free manual at http://www.valueline.com/pdf/common.pdf (grey shaded text box, page 14, PDF page 19).

 

 

Armin’s SSG:

 

– On 11-8-08, the six analysts I always check for every SSG were estimating long-term EPS at an average of 11.00% with VL way, way low of 1.5% and FactSet CallStreet via CNN Money high at 15.00%.  Reuters via Morningstar was 11.40%; First Call via Yahoo Finance was 11.97%; Zacks.com was 12.14%; and S&P was 14.00% (down from 14.50% on 9/29/08).

 

– Rather than ignore the atypical VL estimate, I decided to use the average of all 6 estimates less 1 standard deviation (11.00 – 4.85 = 6.15 or 6.00% rounded).

 

– VL has substantially lowered its EPS estimate this past year from 11.00% on 1-4-08 to 1.5% on 10-3-08.  VL also lowered its estimated High Price from $55-75 to $35-50.

 

– Zacks.com is the only site I know of that routinely makes an explicit long-term Sales growth estimate which was 11.28% for LOW.  Morningstar sometimes makes a Sales estimate, but not for LOW.  First Call via Yahoo Finance offers short term Sales growth estimates which were 8.1% this year and 8.2% next year for LOW.

 

Take Stock:

 

– Take Stock began with an unreasonably low EPS estimate for the next 5 years (-5.7%) and, as a result, is doomed to finish with a poor Total Return (-15.9%).  The reason it’s impossible to imply an Upside-Downside Ratio for LOW is because TS’s Forecast Low Price ($24.85) is higher than LOW’s Present Price ($19.66) and that’s a big SSG NO-NO.

 

– Armin