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Saturday, 24 April 2010
Lowe's Companies Inc. (LOW) "Trading Transparency"

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

As part of this blog, I work to keep you updated of my own trading activity, sharing with you my successes and my failures and hopefully learning from both.

On Friday (4/23/10), I had the good fortune to have my shares in TJX Companies (TJX) hit my first 'appreciation target' and I sold 8 shares of my 60 share position--representing 1/7th of my holding. The day before my Abbott Laboratories position was sold after hitting an 8% loss--another target but that time on the downside--and I sold the entire position.  These two trades demonstrate my practice of selling entire positions quickly and completely as they decline to targeted prices and selling gaining positions slowly and partially as they appreciate.  

In addition, with my Abbott (ABT) sale on the downside, my 'signal' was to do nothing--to literally sit on my hands with the proceeds of that sale as this was a sale on 'bad news'.  However, the partial sale of TJX, since I am under my maximum of 20 holdings, means that I had a 'good news' event and thus had a single to pick up a new position.

I chose to use that signal to acquire 110 shares of Lowe's Companies (LOW) at $28.16/share, with a total purchase cost of $3,105.20.  I derived this position size by determining the average size of my remaining holdings and purchasing approximately 125% of that average in terms of the value and then determining the number of shares.  Thus, besides adding a new holding to increase exposure to equities, I try to increase the size of that holding beyond the average size of the other stocks in my portfolio.  If and when I should decrease to my minimum of 5 holdings and one is sold, I am still required to buy another stock but instead of increasing the size of the holding I plan on purchasing shares in that particular situation at 80% of the average (4/5 vs 5/4) thus continuing to hold the minimum of 5 positions but at the same time reducing my own exposure to equities once again in the face of 'bad news'.

As with every investor, I try to make as thoughtful an investment as possible and try to consider the stock market environment in which I am making that purchase.  

There is no doubt that the construction industry has been hard hit during the recent global recession.  However, the United States economy is recovering, and recent reports suggest new home sales are starting to rebound, and housing starts and permits are rising along with economic prospects.  The consumer is sharing this optimism as this recent news story points out that remodeling spending is making a turn: "This year could produce the first annual spending increase for the industry since 2006," per Nicolas P. Retsinas, the director of the Joint Center for Housing Studies at Harvard University.

With this in mind, I turned to the retail home improvement sector for a new stock selection for my own account.  Choosing between Home Depot (HD) and Lowe's (LOW) was a difficult task, but while both companies sport great records, Lowe's appears to be doing well in terms of building consumer preference. I suspect that either stock shall be doing well into the near future.  I chose to go with Lowe's (LOW) with this purchase.  

Let's take a closer look at this company.

According to the Yahoo "Profile" on Lowe's (LOW), the company

"... together with its subsidiaries, operates as a home improvement retailer in the United States and Canada. The company offers a range of products for home decorating, maintenance, repair, remodeling, and property maintenance. It provides home improvement products in the categories of appliances, paint, lumber, flooring, building materials, millwork, lawn and landscape products, hardware, fashion plumbing, tools, lighting, seasonal living, rough plumbing, nursery, outdoor power equipment, cabinets and countertops, rough electrical, home environment, home organization, and windows and walls, as well as boards, panel products, irrigation pipes, vinyl sidings, and ladders. The company also offers installation services through independent contractors in various product categories."

and

"As of January 29, 2010, it operated 1,710 stores, including 1,694 stores in the United States and 16 stores in Canada."

In contrast, Home Depot (HD) operates 2,244 stores including stores in the Virgin Islands, Guam, Canada, China and Mexico.

On February 22, 2010, Lowe's reported 4th quarter 2009 results.  Profit for the quarter rose 27% to $205 million or $.14/share, from $162 million or $.11/share the prior year.  This exceeded Thomson Reuters analysts who had expected $.12/share.  More significantly, this increase was the first year-over-year increase in earnings since the 2nd quarter of 2007.

Revenue climbed 2% to $10.17 billion, from $9.98 billion the prior year same period also slightly ahead of the $10 billion expected by analysts.

For the year, profit declined 19% to $1.78 billion and revenue dipped 2% to $47.22 billion.  The company did authorize a $5 billion share buyback program as well. 

The company did lower guidance for the first quarter of 2010 (which should be reported in the upcoming weeks) to $.27 to $.29/share in earnings, below analysts' expectations of $.33/share, and revenue of $11.94 to $12.18 billion, fairly in line with analysts expectations of $11.97 billion.  At the same time the company expressed optimism about the 2010 outlook overall.

Longer-term, if we review the Morningstar.com "5-Yr Restated" financials, we can see that revenue climbed from $43.2 billion iun 2006, peaking at $48.3 billion in 2008, $48.2 billion in 2009 and dipped to $47.2 billion in 2010. (The latest quarter has bucked this trend.)  Earnings followed this rising from $1.73/share in 2006 to $1.99/share in 2007 before dipping to $1.86/share in 2008, $1.49 in 2009, and $1.21/share in 2010.  

Lowe's Companies (LOW), has increased its dividend throughout this period with $.11/share paid in 2006 increasing to $.36/share in 2010.  In fact, Motley Fool recently highlighted Lowe's for its dividend record.  Lowe's has managed its business well, increasing free cash flow from $337 million in 2008 to $2.26 billion in 2010, even as revenue and earnings dipped.

The balance sheet appears solid with $632 million in cash and $9.1 billion in other current assets.  When compared with the $7.36 billion in current liabilities, this yields a current ratio of approximately 1.3.  The comnpany does have a significant long-term debt load of $6.6 billion according to Morningstar.com.

In terms of valuation, reviewing the Yahoo "Key Statistics" on LOW, we can see that the company is a large cap stock with a market capitalization of $40.73 billion. The trailing p/e is a moderate 23.34 with a forward p/e (fye Jan 29, 2012) of 16.70.  The PEG ratio (5 yr expected) works out to 1.62 suggesting that future earnings are already reflected in the price.

According to the Fidelity eresearch website, LOW has a Price/Sales ratio of 0.88, well under the industry average 1.03 suggesting reasonable valuation. Paul Sturm of SmartMoney wrote an outstanding article a few years ago explaining this particular ratio in terms of comparing valuation of a company relative to other companies in the same industry group.

Yahoo reports Lowe's with 1.44 billion shares outstanding and only 17.51 million shares out short representing a short ratio of only 1.6--well under my own arbitrary 3 day rule for significance in this ratio.  The comnpany pays a dividend of $.36/yr going forward yielding 1.3%.  This represents a payout ratio of only 29% suggesting good coverage for continued payment and plenty of room for another dividend boost.  Lowe's last split its stock in July, 2006, when they had a 2:1 stock split.

If we review the 'point & figure' chart on Lowe's Companies (LOW), we can see that the stock declined steadily from $34 in February, 2007, to a low of $13.00 in March, 2009.  Since then the stock has moved higher, breaking through resistance in April, 2009, and recently moving as high as $28.22.  While not without recent price appreciation, the stock chart does not appear to suggest extreme over-valuation on a technical perspective.

In summary, we have experience a terrible bull market with an associated economic recession exceeded only by the Great Depression.  As the economy recovers, the consumer is once again starting to consider buying a home and remodeling or building a new home.  While far from the peak in activity before the real estate implosion, this uptick in economic activity bodes well for the home improvement area and this is reflected in the recent strength of both Lowe's and Home Depot (HD). 

With my own sale of a portion of another successful retailer, TJX, the opportunity presented itself to add another position.  I believe that Lowe's may be a timely addition to my own stock portfolio which along with the economy is doing its best to recover!  

If you have any comments or questions, please feel free to leave them right here on the website or email me at bobsadviceforstocks@lycos.com.

Yours in investing,

 

Bob


Posted by bobsadviceforstocks at 11:17 PM CDT | Post Comment | Permalink
Updated: Sunday, 25 April 2010 12:14 AM CDT

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