Lowe's Companies (LOW -1.77%) is the world's second-largest home improvement chain, raking in $83.7 billion in trailing-12-month sales, which puts it behind Home Depot. In the past 50 years, the North Carolina-based company has generated a monster total return of 245,200%, generating massive wealth for early shareholders. I'm sure some of them have become millionaires.
But with the retail stock trading not that far off its peak and the business carrying a large market capitalization of $150 billion, can Lowe's turn new investors into millionaires?
Ongoing challenges
The macro headwinds of the past couple years, namely higher interest rates and inflationary pressures, might be easing. However, Lowe's continues to feel the pain with softer demand from customers.
During the latest fiscal quarter (Q3 2024 ended Nov. 1), the company generated $20.2 billion in revenue, down 1.5% year over year. This was driven by a 1.1% decline in same-store sales, a key metric for any retailer.
Lowe's called out weakness among its DIY customers. They aren't inclined to tackle costly renovation projects right now. "We continue to see ongoing pressure in DIY bigger-ticket discretionary projects in categories like flooring, kitchen and bath, and decor," Bill Boltz, executive VP of merchandising, mentioned on the Q3 2024 earnings call.
The bright spot is that management did, however, raise their full-year guidance. They now expect total revenue to come in between $83 billion and $83.5 billion in fiscal 2024, up $300 million from the prior outlook.
Zoom out
Lowe's latest financial figures might not be encouraging, but investors should take a step back and understand the broader macro and industry backdrop. The Federal Reserve has started cutting interest rates, which could boost economic growth. This can support higher demand for Lowe's. Perhaps households will stop holding off on those big renovation projects when they believe better days are ahead.
The broader industry also benefits from some notable tailwinds. The median age of a home in the U.S. was 40 years in 2022. That was up significantly from 31 in 2005. Moreover, there is a huge housing inventory shortage of 4 million to 7 million in this country, which has been well-documented for some time. Both of these trends favor Lowe's because they incentivize consumers to spend money to improve their current homes, as opposed to buying a new dwelling.
Valuation and capital returns
Lowe's shares have crushed the market over the very long term. Even in the past five years, this outperformance holds true. Lowe's has produced a total return of 157% since late November 2019.
You'd think the stock trades at a steep valuation, but that's not the case. As of this writing, shares can be bought for a price-to-earnings (P/E) ratio of 22.9. This is slightly cheaper than the trailing-10-year average. And it's below the 24.7 P/E ratio of the S&P 500.
The company's shareholder-friendly capital allocation policy also can't be ignored. Lowe's has paid a dividend that has risen for more than 25 years straight. And management consistently repurchases outstanding shares, buying back $758 million worth of stock just in the last three months.
Add this to a below-market valuation, and one that represents a 22% discount to its main rival Home Depot, and Lowe's deserves a closer look from those looking to invest in a business that should start to see demand pick up in a more favorable operating environment.
However, for those of you looking to become millionaires off of this stock, it's best to temper your expectations. This is a massive corporation. Naturally, the returns going forward aren't going to be as impressive as they were in the past.
