Could Lowe's Home Improvement Improve Your Portfolio

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In my continuing effort to "rebuild" my portfolio I am taking advice from industry gurus like Ben Graham and Warren Buffet who recommend looking first at companies you know best. As a self-confessed hardware store and home improvement center junkie, I’m going to look at Lowes Home Improvement Centers (LOW) today as a possible investment.

I am quite sure I owned it a few times back in my active day trading times and did quite well playing seasonal swings and other events. This time around, I am going for a bit longer holding period so will take a harder look and you can benefit from my research.

Grass Roots Love of the Company is a Good Place to Start

I love to go to Lowe’s just to see what is new and my late wife accused me of having a “tool fetish.” I do own more screw drivers of every shape and size known to man and could have my own week long garage sale with all the other assorted power tools and widgets known to man.

My father in law was the same way and I inherited many of his odd tools over the years. So tools and what they can do are in my blood. I built two houses in my younger years and always enjoyed figuring out the right tool for the job and going to the hardware store or home improvement center to talk with a subject area expert. I still go to the plumbing department once in a while just to challenge them!

But alas, I can’t let my love of tools be my only guide!

Company History and Financial Performance

Even though I know this company well living within 45 minutes of their corporate headquarters in Wilkesboro, NC and a habitual visitor to what is almost a corporate store (corporate employees often “moonlight” as store employees to keep their skills sharp), I’ll do my due diligence and document their history “for the record.”

Here are some facts from the corporate website:

  • Founded in 1946
  • “Started as a typical, small town hardware store selling everything from overalls and bicycles to wash tubs, work boots and even horse collars” – my father in law would have shopped there because he was an old horse trader.
  • “By eliminating wholesalers and dealing directly with manufacturers, Lowe's established a lasting reputation for low prices.”
  • Went public in 1961 and began trading on the New York Stock Exchange in 1979 (NYSE: LOW).
  • Now the second largest home improvement retailer worldwide and eighth largest retailer in the United States.
  • They open a new store every three days – that was a WOW factor for me!
  • Overall revenues grew from $11 Billion in 2004 to $55 Billion in 2014
  • Unfortunately costs are growing at the same level so profitability has not kept pace with rival Home Depot – the 400% increase in sales only yielded a 300% growth in profits
  • Two footprints for store include 94,000 square foot stores in metro areas and 94,000 square foot stores in small to mid-sized markets.

I frequent the latter most often but occasionally visit the bigger store in nearby Winston Salem or Charlotte’s mega store. I take my grandkids along for the experience and their Dad (my son-in-law) is also a home improvement nerd so we do lots of projects together.

Four generations of tool nerds see Lowe’s as a stand out performer and love the personalized service of the subject experts in every department. The appearance of the two home improvement giants reflect the focus on profits over creature comforts. Lowes feels like a department store and Home Depot feels like a lumber yard, but when profit is king is hard to argue with the success of Home Depot.

The company is focusing more on profitability of late and at least some Wall Street analysts believe they will see some more positive growth in profitability over the next couple of years.

Recent Financial Performance

As expected, Lowe’s demonstrates a solid foundation and history of consistent growth.

Here are pertinent facts from the most recent annual and quarterly reports:

  • Net earnings of $450 million for the quarter ending Jan 30, 2015
  • Earnings per share increased 58.6 percent to $0.46
  • For the fiscal year ended January 30, 2015, net earnings increased 18.0 percent from the same period a year ago to $2.7 billion, and diluted earnings per share increased 26.6 percent to $2.71.
  • Sales increased 7.6 percent to $12.5 billion from $11.7 billion in the fourth quarter of 2013
  • For the fiscal year, sales were $56.2 billion, a 5.3 percent increase over the same period a year ago.

Current Status

The company currently operates 1,840 home improvement and hardware stores in North America representing 200.9 million square feet of retail space.

Company Management and Performance

In the most recent annual report, company chairman Robert Niblock again emphasized the company is working to improve profitability and said: "We remain focused on improving our profitability even while investing in key capabilities to drive sales growth . . . our transformation is gaining momentum, and macroeconomic fundamentals are aligned for modestly stronger home improvement industry growth in 2015."

Time for a Decision – Are We In or Out on LOW?

Lowes stock is at or near an all-time high and I don’t see the opportunity to for short term growth. Industry rival Home Depot is beating them on the profitability line and on stock performance.

As much as I prefer Lowe’s over Home Depot for the shopping experience and I will continue to honor them with my tool spending dollars, I’m going to take a pass on LOW as an investment for now and suggest you do the same. I’m going to keep an eye on them and if the share price pulls back, I may reconsider, but for now I am a “no go” on this one.

So, yes to them helping you improve your home but no to the stock helping to grow your portfolio is my final answer on this one.

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