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Stock Analysis & Ideas

Lowe’s: High-Quality Company Boosted by Large Buybacks

Lowe’s Companies (LOW) is a home improvement retailer with 1,974 stores globally. It is the smaller but main rival of Home Depot (HD), who together, dominate their industry. Despite this, we are neutral on the stock.

Measuring Efficiency

Lowe’s needs to hold onto a lot of inventory in order to keep the business running. Therefore, the speed at which a company can move inventory and convert it into cash is very important in predicting success.

To measure its efficiency, we will use the cash conversion cycle, which shows how many days it takes to convert inventory into cash. It is calculated as follows:

CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding

Lowe’s cash conversion cycle is 33 days, meaning it takes the company 33 days for it to convert its inventory into cash. In the past several years, this number has trended downwards, indicating that the company’s efficiency has improved.

In addition to the cash conversion cycle, let’s consider Lowe’s gross margin trends. Ideally, we like when the gross margin expands each year, unless it is already very high, in which case it is acceptable for it to remain flat.

In Lowe’s case, its gross margins have remained fairly flat in the past several years, at around 33-34%. This demonstrates that competitors have not chipped away at its competitive advantage and pricing power.

Dividend & Buybacks

Lowe’s currently has a 1.34% dividend yield, which is below the sector average of 1.5%. When taking a look at its LTM free cash flow figure of $8.3 billion, its $1.98 billion dividend payment looks safe.

Taking a look at its historical dividend payments, we can see that its yield range has trended downwards in the past several years.

At 1.34%, the company’s dividend is near the low end of its range, implying that the stock price is trading at a premium relative to the yields investors have seen in the past.

However, Lowe’s has put a lot of capital towards buying back its own shares. In fact, its buyback yield in 2021 was 8.7%. In the past five years, the buyback yield averaged 4.9%, with the decade’s average being even higher.

This has equated to a significant reduction in shares outstanding over the past 10 years. In 2013, the number of weighted average basic shares outstanding was 1.15 billion. In the last quarter, this number was only 673 million.

This has allowed the earnings per share growth to outpace the growth in net income, which definitely helped Lowe’s to achieve the share price appreciation it has enjoyed over the past decade.

Wall Street’s Take

Turning to Wall Street, Lowe’s has a Strong Buy consensus rating, based on 14 Buys, two Holds, and zero Sells assigned in the past three months. The average Lowe’s price target of $280.80 implies 25.3% upside potential.

Analyst price targets range from a low of $240 per share to a high of $300 per share.

Final Thoughts

Lowe’s is definitely a high-quality company. Its efficiency has improved over the years and the earnings per share figures have been turbocharged by the company’s buybacks. Nonetheless, we remain neutral because we want to see a clear trend reversal to the upside.

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