After handily outperforming the S&P 500 index over the past five years, home improvement retailer Lowe's (LOW -0.04%) has shed 19% year to date, notably worse than the S&P 500's 3% decline.
This raises the following question: Has Lowe's recent poor performance created a buying opportunity for investors? Let's examine the stock's fundamentals and valuation to address this question.
Lowe's had a tremendous 2021
When Lowe's released its earnings report for the year ended Jan. 28, the company reported admirable top and bottom-line growth.
Lowe's recorded $96.3 billion in net sales during fiscal 2021, up 7.4% over the previous year. This was on top of an incredible showing in fiscal 2020 when revenue surged over 24%. So how did Lowe's deliver such strong growth for a large-cap stock?
The company grew comparable sales 6.9% year over year. An 11.1% increase in its average ticket size was driven by growth in 11 of its 15 merchandising departments during the year and price increases. Offsetting that growth was a 4.2% decline in comparable transactions.
As has been the case for some time now, the lucrative professional contractors (i.e., Pros) market remains a focus for the company. Since Pros spend significantly more than DIY customers per transaction, they're often more profitable. Lowe's only derives about 20% to 25% of its total sales from Pros, but the company's introduction of new brands/products and the re-platforming of Lowes4Pros.com to the cloud are just a few moves that should help to expand its Pros segment over time.
Lowe's reported $12.04 in non-GAAP (adjusted) diluted earnings per share (EPS) for the year, up 55.4%, thanks to a higher sales base and increased operating efficiency. Lowe's was able to improve its non-GAAP net margin 230 basis points to 8.8%, and a 6.8% reduction in its outstanding share count also contributed to the strong EPS growth.
Due to the anomalies of the COVID-19 pandemic, analysts aren't expecting Lowe's to repeat this performance going forward. But with an aging housing supply and healthy consumer balance sheets, analysts do anticipate Lowe's will be able to produce respectable 14.5% annual earnings growth over the next five years.
Image source: Getty Images.
Rock-solid financial condition
Lowe's growth prospects appear to be promising for the foreseeable future, but what makes the stock even more compelling is its financial strength.
Lowe's interest-coverage ratio improved from 11.4 in fiscal 2020 to 13.7 last year ($12.1 billion in EBIT/$885 million in interest costs).
This signals the stock would be able to service its debt through almost any economic environment.
A dividend increase is around the corner
Another characteristic of Lowe's that makes it an attractive stock to own for the long haul is its reputation of dividend growth. Due to its low payout ratio and strong earnings growth, the stock will likely announce a double-digit percentage hike to its dividend in late May. This would be Lowe's 60th consecutive year of payout increases, which is one of the longest streaks, even among Dividend Kings.
Lowe's payout ratio was just 24.9% last year. This provides the stock with a great deal of flexibility to repay debt, execute share repurchases, and invest in the business to drive future earnings growth.
Lowe's 1.5% dividend yield won't wow income investors, but the potential for continued, long-term payout growth is still enticing.
A deeply discounted Dividend King
Market overreaction to Lowe's midpoint guidance of flat net sales and 10.9% diluted EPS growth for fiscal 2022 has created a buying opportunity.
Lowe's is trading at a forward price-to-earnings (P/E) ratio of 15.6, well below the forward P/E ratio of 18.2 for the S&P 500. For arguably one of the best retailers in the world, that's a bargain.
