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Lowe’ stock is the BIGGEST investment of the world renowned investor Bill Ackman, touted as the next Warren Buffet. It takes a 23% share of his total portfolio and he really believes the stock is trading below fair value. In this video I will make a business breakdown of their business, I will examine their latest company report and at the end I will make a fundamental analysis to see how the business is positioned.
Stay tuned to find out this and other interesting information! As . Lowe’s operated 1,969 home improvement and hardware stores in the U.S. and Canada . The Home Improvement Stores industry in the US is the 7th ranked Retail Trade industry by market size and the 53rd largest in the US. The market size of the Home Improvement Stores industry in the US has grown 5.7% per year on average between 2017 and 2022 and in 2022 it is expected to grow by 1.3%.
The primary negative factors affecting this industry are housing starts and private spending on home improvements. These statistics and information are stemming from IBISworld.com. The underlying growth of the industry is not huge and as such we as investors must demand a lower multiple to earnings, but we will come to this in a short moment.
As the housing market is of the biggest importance for the underlying growth in Lowe’s business I think it is best to check some stats. The housing affordability index is at its lowest level since 1989, this is due to very high property prices and at the same time very high current mortgage rates. The 30 yr US fixed mortgage stands at 7%, the highest in 22 years.
The next graph is showing how the housing starts are now at a 17 month low, which is a very negative catalyst for Lowe’s over the next couple of years. The Homebuilders confidence index is also signaling a recession-like weakness. As the current score is below 50 and this indicates a very negative sentiment.
As I have just discussed the overall industry specifics, let’s now go through Lowe’s latest business performance. According to analysis by Market Watch, The Home Depot possesses roughly 17 percent of the market share for home improvement retail. Lowe's comes in second with about 12 percent market share.
Let’s now look at the latest Q3 Results of Lowe’s which came out on the 16th of November. Year on year the revenue of Lowe’s increased by 2.2%. During this quarter Lowe’s repurchased $4 billion worth of their own share, and the total share-repurchases for the 9 months of 2022 equate to $11.85 billion this is higher than the first 9 months of 2021 when the share-repurchases were 8.7 billion dollars.
With a current market cap of 129 billion, to have share repurchases of 12 billion for this year is bonkers. This is about 10% of the company and this is a main reason behind the company’s good performance and also it is a main reason why Bill Ackman has Lowe’s as his biggest investment position. The share repurchases increase the investment return to us investors, some investors look at them as direct return, meaning if Lowe’s bought back 10% of the shares, then that gives us a 10% return on a fundamental basis.
Others like Harvard professor Xavier Gabaix have developed the inelastic market hypothesis theory in which he states that for every dollar of share buybacks a company does, the stock price goes up by 5 dollars. So there is according to his research and thesis a 1 to 5 correlation. On top of this Lowe’s is paying out dividends with the current yield being 2%.
Lowe’s Dividend Payout Ratio is only 0.23 according to Gurufocus, this is a very low level as it says that only 23% of earnings equate to the dividend payments. This means the company can increase its dividends in the future. Also their 5 year dividend growth rate is 16%, which is a very good dividend growth.
When it comes to their debt management I am not a fan and I see big issues in their balance sheet. Lowe’s have total assets of $47 billion as of Q3 while their total liabilities are $59.8 billion. This gives them a negative equity of about $12.8 billion, which is unacceptable to me as an investor. With the current business environment and central bank tightening, I see that the future profit margins of Lowe’s might get very squeezed.
Not only that it is very likely that their sales will decrease, but also as the FED increases interest rates this makes their debt payments higher, which eats out the earnings of the company. In general the business is good, but the debt could be much lower, also for a business which is giving out 2022 guidance of revenue growth of about -1% I think a P/E of 16 is a bit high, if a company is not growing and it is a big company, then I would like to see a P/E in the range of 10 to 12 in order for me to consider it.
In general I always try to invest in companies which have all four categories checked. High moat, low debt, low earnings multiple and high efficiency ratios. You can check out my other videos here on the channel as I analyze other stocks which cover all 4 of these criteria. I hope you found some value in this analysis and if you did - please like and share the video with others who might find it useful.
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