Here is a look at how Lowe's Companies, Inc. (LOW) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?) :
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
- Moderate PEmg ratio - PEmg is less than 20 - FAIL
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
Key Data:
| MG Value | $20.33 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $25.04 |
| Value Based on 0% Growth | $14.68 |
| Market Implied Growth Rate | 9.31% |
| NCAV | -$8.87 |
| PEmg | 27.12 |
| Current Ratio | 1.17 |
| PB Ratio | 3.81 |
Balance Sheet - 7/31/2013
| Current Assets | $10,913,000,000 |
| Current Liabilities | $9,340,000,000 |
| Total Debt | $9,015,000,000 |
| Total Assets | $33,408,000,000 |
| Intangible Assets | $0 |
| Total Liabilities | $20,346,000,000 |
| Outstanding Shares | 1,063,000,000 |
Earnings Per Share - Diluted
| 2014 (estimate) | $2.14 |
| 2013 | $1.70 |
| 2012 | $1.44 |
| 2011 | $1.43 |
| 2010 | $1.22 |
| 2009 | $1.49 |
| 2008 | $1.86 |
| 2007 | $1.99 |
| 2006 | $1.73 |
| 2005 | $1.36 |
| 2004 | $1.16 |
| 2003 | $0.93 |
Earnings Per Share - Modern Graham (Calculating EPSmg)
| 2014 (estimate) | $1.73 |
| 2013 | $1.50 |
| 2012 | $1.43 |
| 2011 | $1.48 |
| 2010 | $1.56 |
| 2009 | $1.71 |
Conclusion:
Lowe's Companies is not very attractive from a ModernGraham perspective at this time. The company has failed to adequately grow earnings over the last ten years, has a poor current ratio, and trades at high PEmg and PB ratios. As a result, it does not pass the requirements of either the Defensive Investor or the Enterprising Investor. The company has only grown EPSmg (normalized earnings) from $1.71 in 2009 to an estimated $1.73 for 2014, a result that does not even come close to supporting the 9.31% growth rate implied by the market. It's likely this company is overvalued right now, presumably because the market expects Lowe's to do better once the housing market recovers, and it's true that the company should do better and has shown some improvements over the last few years. However, value investors should wait to see if the company can prove itself before getting involved in speculating about the future earnings. After all, value investing is all about fundamental analysis and the fundamentals don't currently support the market's implications here.
Disclaimer: The author did not hold a position in Lowe's Companies at the time of publication and had no intention of entering into a position within the next 72 hours.
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