The stock of Lowe's (NYSE:LOW, 30-year Financials) is estimated to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $189.31 per share and the market cap of $133.8 billion, Lowe's stock is estimated to be modestly overvalued. GF Value for Lowe's is shown in the chart below.
Because Lowe's is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 13.5% over the past three years and is estimated to grow 0.78% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Lowe's has a cash-to-debt ratio of 0.24, which is worse than 72% of the companies in the industry of Retail - Cyclical. The overall financial strength of Lowe's is 5 out of 10, which indicates that the financial strength of Lowe's is fair. This is the debt and cash of Lowe's over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Lowe's has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $94.3 billion and earnings of $9.18 a share. Its operating margin is 11.55%, which ranks better than 83% of the companies in the industry of Retail - Cyclical. Overall, the profitability of Lowe's is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Lowe's over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Lowe's is 13.5%, which ranks better than 85% of the companies in the industry of Retail - Cyclical. The 3-year average EBITDA growth rate is 14.2%, which ranks better than 66% of the companies in the industry of Retail - Cyclical.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Lowe's's return on invested capital is 26.01, and its cost of capital is 8.11. The historical ROIC vs WACC comparison of Lowe's is shown below:
In conclusion, The stock of Lowe's (NYSE:LOW, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 66% of the companies in the industry of Retail - Cyclical. To learn more about Lowe's stock, you can check out its 30-year Financials here.
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