Morningstar

Lowe’s Earnings: Core Business Marches Along While FBM Acquisition Provides Growth Opportunities

We plan to raise our fair value estimate of Lowe’s stock.

An exterior view of a Lowe's home improvement store.
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Securities in This Article
Lowe's Companies Inc
(LOW)

Key Morningstar Metrics for Lowe’s Companies

What We Thought of Lowe’s Companies’ Earnings

Lowe’s Companies LOW delivered second-quarter sales of $24 billion on 1.1% same-store sales growth and adjusted earnings per share of $4.33. The firm also announced its acquisition of Foundation Building Materials for $8.8 billion, gaining exposure to the North American interior building product distribution network.

Why it matters: As existing-home sales have stalled, tempering do-it-yourself demand, Lowe’s is following Home Depot’s strategy of capturing growth via pro acquisitions.

  • The FBM tie-up follows the $1.3 billion acquisition of Artisan Design Group in June, which added 150 facilities across 25 states. FBM offers another 370-plus locations across the United States and Canada for wider pro and cross-selling reach, expanding Lowe’s total addressable market.
  • The FBM deal valuation seems reasonable at 13.4 times adjusted EBITDA. This is below the 16.1 times EBITDA Home Depot paid for SRS and 15 times EBITDA for HD Supply. On a sales basis, 1.35 times for FBM is higher than 0.74 for Artisan Design Group but better than 1.86 for SRS.

The bottom line: We plan to raise our $234 fair value estimate for wide-moat Lowe’s by a high-single-digit rate, placing the stock in fairly valued territory. Both the multiple and the relative entry point are more attractive than Home Depot’s.

  • Strategically, the FBM transaction makes sense. It will give Lowe’s access to sales across the homebuilding cycle, diversify its customer base, and expand its distribution capabilities. We maintain our Exemplary Capital Allocation Rating.

Key stats: The core business remains stable. Same-store sales tickets rose 2.9% and transactions fell 1.8% in the second quarter. Gross margin grew nearly 40 basis points to 33.8%, helped by better shrink, credit revenue, and productivity initiatives, leading to operating margin of 14.7%.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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