Market Mad House

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Long Ideas

Lowe’s proves Home Improvement is a Safe Investment in the Midst of Retail Apocalypse

Lowe’s (NYSE: LOW) is demonstrating that home improvement stores are a very safe investment even the midst of the retail apocalypse. Home Depot’s (NYSE: HD) closest competitor reported significant revenue growth, in an age when retail icons like Sears (NASDAQ: SHLD) and Target (NYSE: TGT) are struggling to survive.

TTM revenues at Lowe’s increased by $3.23 billion between April 2015 and April 2016. Revenues rose from $56.95 billion in 2015 to $60.18 billion; at the end of first quarter 2016. Those revenues increased by $1.11 billion during the first quarter of 2016; rising from $59.07 billion in January, to $60.18 billion in April.

This company is reporting substantial real revenue growth in a dramatically changing retail landscape. More importantly, Lowe’s does not seem to be affected by the massive disruption Amazon (NASDAQ: AMZN) is causing to the industry.

Lowe’s is a Value Investment

Smart value investors know that revenue growth alone, does not make a company great. There are companies where significant revenue growth does not translate into cash or float, such as Dollar General (NYSE: DG).

Fortunately this is not the case at Lowe’s; the hardware and appliance emporium reported making $5.526 billion in cash from operations on April 30, 2016. That cash is also growing at an impressive rate; Lowe’s reported $4.784 billion in cash from operations in January 2016.


The cash gives Lowe’s a lot of float for a retailer; the company reported retaining $4.735 billion in cash and short-term investments, on April 30, 2016. Lowe’s business model not only generates a lot of cash, the company has the ability to keep a significant portion of that cash.

Lowe’s float and bank account have also been growing in a dramatic way. In April 2015, Lowe’s reported $1.529 billion in cash and short-term investments.

This means that Lowe’s is in a great position to make a major acquisition or embark upon a large expansion drive if it wishes. The company also has the resources for major stock buybacks or dividend increases.

Lowe’s is making one major expansion with its purchase of RONA; a Canadian home improvement retailer will 500 stores, reported. That acquisition will cost $2.3 billion, and it received regulatory approval in May.

Is Lowe’s a Good Investment?

Some of the more traditional stock metrics also look great at Lowe’s. It reported a net income of $2.757 billion, a diluted EPS of 2.992, a profit margin of 5.08% and a free cash flow of $3.012 billion on April 30, 2016.


Investors were rewarded with a dividend yield of 1.45% and a return on equity of 33.29%. That makes Lowe’s both a growth stock and a value investment. Those looking for a good retail stock would be well advised to check out this home improvement warehouse. The shares are well worth the $77.06 they were selling for on June 24, 2016.

What is more interesting is that the nature of Lowe’s business makes it a very good long-term investment. The factors propelling the retailer’s growth, will give it a lot of float for years to come.

Lowe’s has a Very Wide Moat

The best thing about Lowe’s is that it has a very wide moat for a retailer. The moat limits competition and protects it from upstarts such as Amazon.

Unlike most retailers, Lowe’s has only one direct competitor; Home Depot. Its management does not have to worry about a half-dozen other brands trying to replicate its business model in each market.

Competition is limited because of the sheer size and complexity of Lowe’s operations. The average Lowe’s store contains 112,000 square feet of retail space and offers 36,000 items.

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That makes it difficult for a competitor to move in. All a dollar store operator needs is some retail space and shelving to open a store. A home improvement warehouse requires a giant building, and several million dollars’ worth of inventory just to open.

Beyond this Lowe’s offers a wide variety of merchandise and services that Amazon will never able to sell. This includes lumber, large appliances, flooring, roofing, cement, garden supplies and a wide variety of specialty plumbing and building materials. The company also offers 50 installation services that Amazon will probably never be able duplicate.

Lowe’s Professional Moat

Another layer of protection is provided by Lowe’s professional customers who account for 30% of its business. The professional customers are contractors and tradespeople that rely upon Lowe’s for building and other supplies. Examples of such pros include builders, plumbers, landscapers, remodelers, painters and carpenters.

These pros required a high volume of specialized materials, and quick service that only an organization like Lowe’s can provide. One way Lowe’s and Home Depot service the professionals with easy ordering and fast delivery of supplies to the job site.

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Lowe’s is trying to extend this moat by developing direct relationships with larger builders and contractors through Account Executive Pro Services. Those executives’ job is to build direct relationships with organizations that operate on a regional or national basis.

Best of all, the professional relationships in the construction industry provide Lowe’s with a market Amazon cannot enter. Building materials are not like office supplies, Amazon and cannot simply add them to their fulfillment centers and begin shipping them out.

Lowe’s and Home Depot have identified one market of small business people Amazon will probably never go near. That provides a steady stream of revenue to finance the more traditional home improvement market.

If you are looking a retailer to buy and hold for a long time, I’d recommend Lowe’s. It has a wide moat, a lot of cash, lots of float growing revenues and great growth prospects. At $77.06 a share, Lowe’s is also a bargain when compared to Home Depot’s $126.4 stock price. Lowe’s is definitely the value investment in home improvement.