Last two years were just average for Lowe’s shareholders, as return was around 0%, which is way below S&P500. On the other hand in the long term company is doing noticeably better than for example Target. Is it the pace of business development which makes a difference or simply currently Target is very cheap vs Lowe’s and it is the matter of current multiples?

First of all let’s see on valuation multiples:

EV/EBITDA ~10

P/E ~ 20

Well definitely not cheap. Can Lowe’s vs Home Depot be compared as Target vs Wal-Mart? Well in my opinion they can be and trading discount is similar. Can both segments be compared?

In my opinion yes and I would even say that I like TGT/WMT more, because of less cyclicality. LOW and HD are in good business momentum and there is a risk for deterioration and in this good momentum their multiples are high! I would definitely play long TGT/WMT and short LOW/HD.

As it comes to short term developments of Lowe’s:

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Not bad, but similarly to Target (and many other companies) most of EPS growth is due to buybacks. That’s not bad, but keep in mind that company is not growing very fast and buybacks ($3.5b) are on lower scale than in TGT.

The question is what to expect from 2017. First off all retail in general is losing with e-commerce. I think that this is also a challenge for Lowe’s. Think in long term -> virtual reality glasses + e-commerce and you can visualize your home without going out! Sure, it is a matter of quality, but who knows…

The second issue is how average consumer will be able to spend money after Trump’s election / interest rates go up again. I think these are key fundamental risk factors. OK, I do not say that company will be hurt a lot, but from long term perspective I do not feel paying 10 times EBITDA now as a special opportunity…

 

Summing up, I still think that Lowe’s is a great company, but for me it is way too expensive.

 

Disclaimer LOW – no position