Lowe's Companies Inc. (LOW, Financial) announced a massive buyback on Wednesday that, when added to its remaining repurchase authorization, would allow the company to repurchase almost 17% of its current market capitalization.
In addition, the company recently reported earnings results that were above Wall Street analysts' estimates.
Shares of the company are trading slightly higher than the last time I covered the stock, but the combination of shareholder returns and recent results continue to drive my bullish thesis.
Quarterly highlights and valuation analysis
Lowe's reported third-quarter earnings results on Nov. 18. The company's adjusted earnings per share grew 57 cents, or 40%, to $1.98, topping estimates by 2 cents. Revenue increased 28% to $22.3 billion. This was $1.3 billion higher than excepted.
Comparable sales were up 30.1%, which easily topped already elevated estimates of 22.8%. E-commerce continues to be an excellent source of growth as online sales reached triple digits during the quarter.
Comparable transactions grew 16.4%, while average ticket sizes were 13.7% higher. What I found to be a very positive sign was that comparable sales growth was split fairly evenly between the number of transactions and average ticket size. This means sales growth wasn't due just to higher foot traffic. Customers were spending a significant more per ticket on average than the prior year.
Each ticket size that Lowe's reports out also showed growth. Tickets of at least $500 grew 32.5%, while tickets in the range of $50 to $500 improved 30.9%. This shows that it wasn't just large tickets that carried the day for Lowe's as the smaller baskets showed excellent growth as well.
Growth was broad-based across regions, which all delivered same-store sales increases of at least 20%, and merchandizing departments, which all posted at least 15% comparable sales growth.
Margins, which has been a primary focus since current CEO Marvin Ellison was named to the position on July 2, 2018, were also higher during the quarter. Gross margins grew 28 basis points to 32.72%, while operating margins increased 79 basis points to 9.75%.
Lowe's balance sheet remains in excellent condition. At the end of the quarter, the company's current assets stood at $26.9 billion, including $10.1 billion of cash, cash equivalents and short-term investments on its balance sheet. The company also has access to $3 billion in undrawn capacity on its revolving credit facilities. Inventory levels grew 14.5% to $15.7 billion. Given demand for products, this buildup doesn't seem unreasonable. The company's current liabilities total $19.6 billion, which includes debt of just $609 million due within the next year. Total debt stands at just over $26 billion.
According to analysts surveyed by Seeking Alpha, Lowe's is expected to earn $8.70 per share this year. This would be a 52% improvement from the prior year.
Lowe's reinstated its share repurchase program during the third quarter and bought back 3.6 million shares at an average price of $173.
On Dec. 11, the home improvement retailer announced its board of directors had authorized a new $15 billion share repurchase program. This new authorization has no expiration and adds to the $4.7 billion remaining on Lowe's prior repurchase program. In total, the company has up to $19.7 billion remaining on its share repurchase authorization. This equates to 16.8% of the stock's market capitalization as of Dec. 9.
GuruFocus believes the stock is already trading above its intrinsic value.
Lowe's has an assigned GF Value of $138.05. This results in a price-to-GF Value ratio of 1.16 when using the current share price of $160.60. This earns the stock a rating of modestly overvalued. Shares would suffer to decline 14% from the current price were they to trade in line with their GF Value.
However, Lowe's has traded nearly in line with its average price-earnings ratio since 2010. The stock currently has a forward price-earnings ratio of 18.5 compared to its 10-year average valuation of 18.4 times earnings, according to Value Line.
Sure, some portion of this year's expected earnings per share growth has a direct relationship to consumers being forced to stay at home due to the Covid-19 pandemic. This has caused consumers to spend to upgrade their homes while they are stuck at home, but analysts believe that next year will also see growth for Lowe's as earnings per share is expected to be $9.12. It appears that those covering the stock believe the gains made this year are sustainable and can be built upon next year.
Lowe's is trading higher than its GF Value, but the stock's valuation is almost at its long-term average. The company's recent business results and its ability to buyback a lot of its own stock make me believe that shares likely deserve to trade with a higher multiple than they currently do.
Final thoughts
Third-quarter results indicate Lowe's doesn't show any signs of slowing growth as comparable sales were much higher than analysts had expected.
The addition of $15 billion to its share repurchase authorization implies that leadership believes shares of Lowe's are undervalued. The company has the ability to retire almost 17% of its current share count.
The company has also raised its dividend for 58 consecutive years. There are only a few companies in the market that have a longer dividend growth streak. The dividend has increased with a compound annual growth rate of 17.4% over the last decade. Shares yield just 1.5%, but the expected payout ratio for this year is 28%. This is lower than the 10-year average payout ratio of 34%.
Historically for the stock, Lowe's isn't that expensive. The company is likely to post impressive earnings per share growth this year and has shown throughout the pandemic that Covid-19 has been more of a tailwind than a headwind to results.
The stock may trade above its GF Value, but recent results, it enormous repurchase authorization and dividend growth streak make me believe the stock has more upside potential. As such, I remain a bull on Lowe's Companies.
Disclosure: The author maintains a long position in Lowe's Companies.
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