Lowes is a high-quality franchise, cheaply valued, and generates massive FCF and is buying back stock--a great situation for a long-term shareholder.
Great business in strong financial position
- Duopoloy market: Lowes and Home Depot represent ~60% retail home improvement market
- Bricks and Mortar can't be beat: goods are project specific and most items do not ship cost-effectively
- Economic moat: Gross margin expansion in 15 out of last 16 years, in the face of a terrible housing downturn. Meanwhile, building products suppliers have suffered and need volume to survive--great bargaining economics for HD/LOW.
- Strong balance sheet00 Lowes is only levered ~1x EBITDA and sitting on ~$3B cash
- The enterprise value today is cheaper today than it was at the bottom of the 2009 market blowout. Trough EBITDA of $4.9B and $2B FCF after large capex investments.
- ~6x EBITDA, 8-9% FCF yield in 2012, even higher when excluding growth capex.
- Lowes aggressively grew store count over the past few years. Any rebound in sales will lead to material improvement in operating leverage and enhance earnings.
Lowes generates cash and returns it to shareholders
- Actively issuing dividends and buying back stock . Lowes has retired $2.4B stock this year, which is ~10%
- Capex investments have a long life ahead of them as a majority of stores are less than 10 years old...i.e., investments were sunk a while ago, time to harvest cash.
- Lowes is an investment grade (rated A) company
- On an LTM EV/EBITDA basis, Lowes trades at just under 6x
- Historically cheap EBITDA multiple
Back of the Envelope:
==>Market Cap 25,500
==>Net Debt 3,526
==>Enterprise Value 29,026
Low-point 4,900 ~6x
LTM 5,257 ==> 5.5x
2011 EPS $1.56 (low guidance)==> 12.8x
2011 EPS $ 1.64 (high guidance)==> 12.2x
Note: $2.4B in buybacks planned, $1B already completed at Q1
Cash from Ops= 4,600
expected FCF 2,100
$2,100/25,500==>8.4% FCF yield
Not a net-net, but a solid franchise at a cheap price.
Margin Expansion--lower SGA and depreciation, solid negotiating leverage with key suppliers
Increasing sales per square foot
Lower capex requirements
Potentially to be a dividend cash cow that will become more and more attractive to retiring baby boomers in the future