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Long Ideas

Is Lowes (LOW) still a Value Investment?

Recent headlines will have many investors asking if Lowes (LOW) is still a value investment. For instance, Lowes is shutting down its Iris Smart Home Platform and closing stores.

In fact, Lowes is planning death for 31 March 2019, DigitalTrends reports. Additionally, Lowes will not charge for Iris after 31 January 2019. Instead, Lowe’s will refund customers’ Iris fees in February.

Dramatically, Lowe’s (NYSE: LOW) is closing 47 stores in the United States and Canada. CNBC reports, Lowe’s will close 27 stores in Canada and 20 in the USA by 1 February 2019. 

Those closings are in addition to the entire Orchard Supply Hardware subsidiary. Specifically, all Orchard Supply locations will close by February 1, 2019, USA Today claims.

Is Lowe’s (LOW) still a value investment after store closings?

Consequently, many people will ask is Lowe’s (LOW) still a value investment. My answer to this question is yes because of Lowe’s financials.

For example, Lowe’s generated a gross profit of $5.66 billion on revenues of $17.415 during 4th Quarter 2018. Moreover, Lowe’s reports an operating income of $957 million, a net income of $629 million, and a gross margin of 32.5% for 4th Quarter 2018.

More importantly, Lowe’s revenues grew at a rate of 3.85% in 4th Quarter 2018. Hence, Lowe’s is making money and it is growing despite store closures.

Finally, Lowe’s reports a healthy operating cash flow of $1.011 billion and an operating cash flow of $728 million for 4th Quarter 2018. In addition, Lowe’s reported $1.668 billion in cash and equivalents and $208 million short-term investments on 2 November 2018.

Lowe’s (LOW) is Still a Value Investment

Lowe’s is a cash-rich company because it reported $1.876 billion in the bank at the end of 4th Quarter 2018. I think the cash makes Lowe’s a value investment at the $97.39 its shares traded at on 4 February 2019.

I consider Lowe’s a value investment because shares of its direct competitor; Home Depot (NYSE: HD), traded at $184.94 on 4 February 2019. Notably, Lowe’s is a profitable and cash-rich company with a low share price and growing revenues.

Lowe’s (LOWE) is a Great Dividend Stock

Finally, Lowe’s is a great dividend stock that offers investors 56 years of dividend growth, reports. Moreover, Lowe’s offered investors a dividend yield of 1.98%, an annualized payout of $1.92, and a payout ratio of 37% on 4 February 2019.

The next Lowe’s dividend is 48¢ scheduled for 6 February 2019. Importantly, Lowe’s dividend grew by 13¢ in a year. To explain, Lowe’s paid a dividend of 35¢ in April 2017 that grew to 41¢ in July 2017 and 48¢ in August 2018.

Thus Lowe’s is the best dividend stock in the home-improvement segment. I think the dividend makes Lowe’s a better buy than Home Depot (NYSE: HD) under present conditions.

Lowe’s (LOW) Uncertain Future

However, Lowe’s faces an uncertain future and serious threats from Amazon (NASDAQ: AMZN) and the Home Depot.

Specifically, Lowe’s (LOW) faces the problem of having too many stores and too much floor space. Currently, Lowe’s is dealing with the problem the traditional way by closing stores.

On the other hand, store closings cannot resolve some fundamental dilemmas facing Lowe’s. For instance, the questions “how big is too big for big box stores,” and how much space do retailers need? In addition, there is the problem of how many locations does a retailer require in the 21st Century.

In particular, is it wise to maintain hundreds of big-box locations when a large percentage of the customers shop via their smartphones? Under those conditions, fulfillment centers and delivery infrastructure are wiser investments.

Lowe’s (LOWE) needs to investigate alternatives to traditional retail

However, the most pressing question is can Lowes make all the locations to pay for themselves. Thus, Lowe’s must investigate alternatives to traditional retail.

An excellent alternative is to operate other kinds of business in stores. For instance, Office Depot (NASDAQ: ODP) is experimenting with co-working spaces in its stores. To explain, firms or entrepreneurs use a co-working environment like an office. For instance, an entrepreneur gets access to amenities she only needs occasionally – like a meeting room or a copier.

In detail, a co-working space like Office Depot’s Workonomy Hub allows freelancers or small businesses to share resources. For instance, Workonomy customers get access to a meeting room, printing facilities, copiers, and tech support.

Could Lowe’s (LOW) enter the co-working sphere?

In contrast, a Lowe’s co-working space might offer contractors access to tools, computer-assisted design facilities, rental trucks, and a machine shop. Moreover, Lowe’s could offer office facilities like meeting rooms and printing in its stores.

Obviously, there are some serious risks from such a space including insurance costs. For instance, insurance claims from paper cuts are lower than those from saw injuries.

Potential solutions for Lowe’s include automated or robotic tools that perform tasks for its customers. For instance, a robot that cuts lumber or pipe to length or a machine that makes parts like bolts for customers.

Notably, companies like SyncFab and Aitheon are experimenting with Internet-of-Things (IoT) solutions that could make custom parts for users at Lowe’s stores. However, I think those companies’ solutions are probably several years from real-world commercialization.

Is Lowe’s (LOW) a real estate company?

Strangely, the most valuable resource at Lowe’s (LOW) could be all the space at its stores. For instance, the average Lowe’s store contains 112,000 square feet indoors and 32,000 feet outdoors.

An obvious use for all that space is partnerships with other retailers. For instance, Lowe’s could lease space to grocers like Amazon’s Whole Foods, Trader Joe’s, Aldi, or Kroger (NYSE: KR). Importantly, such shared spaces can generate additional foot traffic, and rental income.

The most intriguing use of Lowe’s space is to allow smaller stores inside its home improvement centers. For instance, Starbucks (NYSE: NASDAQ: SBUX), 7-11, McDonald’s (NYSE: MCD), Five Guys, or Chipotle (NYSE: CMG) inside Lowe’s.

Other possibilities are raised by Amazon’s Go automated convenience store, and Amazon returns. For example, Kohl’s (NYSE: KSS) now accepts Amazon returns at its stores.

Lowe’s could attract new business by accepting returns of paint, tools, appliances, and other items ordered through Amazon. In addition, Lowe’s can serve as a pickup location or local delivery service for merchandise ordered via Amazon.

Can Lowe’s (NYSE: LOW) make money from the parking lot?

Interestingly, the parking lot is another potential moneymaking resource at Lowe’s.

Lowe’s could allow companies to use its parking lots as storage locations for ridesharing or short-term rental vehicles. For example, allowing BMW ReachNow or ZipCar vehicles to park at Lowe’s. In addition, Lowe’s could place charging stations for electric vehicles, or Tesla Stores, in its parking lots.

A more exotic idea is a self-driving van that hauls the customer’s merchandise to her home and returns to Lowe’s. Thus, autonomous vehicles are a future opportunity for Lowe’s.

The self-driving vehicles will need somewhere to park and perhaps charge. Meanwhile, Lowe’s has vast parking lots at each store it can lease to autonomous vehicle owners. Hence, Lowe’s could make money from the parking lot.

Under these circumstances, Lowe’s 2,350 stores and the land they sit on could be its most valuable resource. Therefore, real estate could keep Lowe’s (LOW) a value investment.