Lowe's: An "Amazon-Proof" Retailer

04/21/2017 2:50 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Lowe’s Companies (LOW) is a top-notch organization operating in one of retailing’s strongest sectors, asserts Roy Ward, editor Cabot Benjamin Graham Value Investor.

Lowe’s is the world’s second-largest home improvement retailer, with over $65 billion in revenue and is second only to Home Depot (HD), with $99 billion revenue total.

The company focuses on retail do-it-yourself customers, do-it-for-me customers who utilize LOW’s installation services, and professional builders and remodelers.

The transition from big box retailing to on-line shopping has created huge problems for U.S. retailers. Several retailers have declared bankruptcy, and many are closing less profitable stores by the hundreds.

Home Depot and Lowe’s are immune from the success of Amazon (AMZN). Products include lumber, building materials, appliances, power tools, cabinets, carpeting, paint, plants, and garden supplies which are heavy and bulky and can’t be shipped cheaply.

Professional contractors, who account for 30% of Lowe’s sales, prefer to buy what they need in stores while non-professional do-it-yourself customers often want to see and touch products and ask for advice before buying.

Home Depot has higher sales per store, reflecting better locations near urban areas and a greater percentage of its sales going to contractors.

Lowe’s is seeking to narrow the gap with Home Depot by better serving contractors through increased inventories and adding a senior executive focused on the contractor segment.

Contractor business is important because it’s growing more rapidly than the do-it-yourself market, reflecting a growing preference among homeowners for professional renovations.

Time constraints in dual-earner households and limited home-improvement skills among younger people have created more demand for professional assistance.

Dividends have been increased every year during the past 52 years. During the past 10 years, the rate of increase is 27% per year, including an increase of 25% in 2016.

At 20.5 times current EPS and with a dividend yield of 1.9%, LOW shares are very attractive for long-term investors. I expect LOW to climb 16% to reach my minimum sell price target of $94.78 within a year.

Overall, these shares are cheaper than Home Depot and  earnings are growing faster. Lowe’s is also Amazon-proof. This stock is an excellent investment in the current environment. Buy now, you’ll be glad you did.

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