hi I'm Jimmy in this video we're looking at lowes ticker symbol LOW this video
is part of our dividend aristocrat series where we're analyzing each of the
companies in the dividend aristocrats ETF with the goal of seeing if we can
find the top dividend paying dividend aristocrat stocks that have a good
chance of paying us a reliable dividend over the coming years ultimately trying
to get us closer to our personal goal of financial freedom okay let's look
quickly at loza's dividend since we're only reviewing this company because
they're part of the dividend aristocrats ETF now I'm sure most of us are not
surprised that their dividend history has been pretty awesome over the past
few years and when we look at analysts estimates going forward
well looks like Alice are expecting for the dividends to continue to grow and
assessments of the green bars okay so that was somewhat expected now our
question is how does loza's business look and what do we think loza's stock
is worth and ultimately do we think that lowe's is one of the top dividend
aristocrats within the NOBL ETF so let's start with a few basics how about
we start with revenue first this is Lowe's revenue going back to 2012 and
clearly they've done a decent job of growing and analysts are expecting for
that growth to continue over the next few years then when we switch over to
net income which is the same thing as profits well net income has also done a
good job of growing but we may notice that net income has more than doubled
since 2012 which is impressive considering that revenue over that very
same time period was up just 41% which isn't bad at all but it's not more than
a hundred percent and I'm sure once we realized that this happened there's only
one good place to look and that is that net income margins so this is nanika
margins on a percentage basis going back to past few years and a few things
probably jump on us here one net income margins are kinda low just as an example
in 2018 home depot had net income margins of 10% and clearly lows as well
behind them now I wouldn't expect for Lowe's or Home Depot for that matter or
any retailer to be as high as something like Microsoft which was almost 30%
in 2018 or Apple which was a bit over 20% 2018 so staying focused on lows lows
okay find the trailing home depot which is a negative thing that they're
trailing but the positive thing is that they are in fact growing the net income
margins that will likely explains why profits are increasing at a faster rate
than revenues and there's probably some upside if Home Depot is in the 9 or 10
percent area Lowe's probably has the potential at least to get to that same
area and this brings us to some recent developments and Lowes business that
could help explain what they're doing to improve margins and what the plan is
looking at at least the next few years so this is a list of the upper
management of Lowe's and when we add how many years they've been there well
clearly we can see this is a fairly new management team now broadly speaking the
early results from this new management team looks promising they're doing a few
things that has the potential to help Lowe's grow and ultimately to try to get
Lowe's as stock to move higher and hopefully keep their dividend growing
for the next few years first management is closing a bunch of underperforming
stores both in Mexico which they're pretty much getting out of fall
completely and some in Canada some in the United States to illustrate the pace
that the current management team is closing stores versus a previous
management team this chart goes back to August of 2017 on a quarterly basis and
I'm sure we can guess this is the amount of stores that have been closed in each
quarter and I'm sure we can guess where the new management team got involved
that's right there now personally I think this is a good move I think that
every business should occasionally do some what's called spring cleaning and
keep the business performing as efficiently as possible along these same
lines management the new management team has also stated their intentions to
improve both the supply chain and inventory management which are two
crucial things in any retail business both of these have the potential to
further improve margins the other financial metric that would also be
affected by these company-wide changes is free cash flow this is a chart of
free cash flow going back to 2012 and also includes four years of
analyst estimates now when it comes to the 2019 numbers well here I think it's
important to point out that the first three quarters of 2019 are already in
the books we're just waiting for the fourth quarter to end and I believe
they're fourth quarter ends in February of each year that that's when their
fiscal year ends so right now they're still operating in the 2019 fiscal year
even though we're already in 2020 that's the reason that this is an estimate but
either way we can see that there's a big drop-off expected in 2019 and there
already has been and clearly it makes sense to have a dip in free cash flow
since management is expecting to spend more than a billion and a half dollars
in 2019 on capital expenditures alone to ultimately try to improve the business
these expenses would reduce free cash flow but then once this is done analysts
seem to be expecting over all that free cash flow continuing to move high so
this brings us to the question what do we think loza's stock is worth today
okay so the first method I tried to value loza's stock was the dividend
discount model now I made somewhat conservative estimates for the dividend
amount Ike she took the last quarter of 2019 and then the first three quarters
of 2020 and I came out with about two dollars and thirty cents estimated for
their dividend now even if that's a bit conservative it doesn't matter all that
much because we came up with a fair value of about $66 per share now
considering that Lowes stock is currently trading at about one hundred
and twenty dollars per share clearly this doesn't give us too much useful
information now one of the reasons at least in the case of lowes that this the
dividend discount model would be so far off from the current value of the stock
is that this doesn't account and all for the growth of the the margins of the
business to grow the business that only focuses on the dividend what the
dividend means to the investor clearly margin improvements and growth
assumptions are tied to the overall stock price as well and they seem to be
improving which is really driving the stock higher so I also think it's
helpful to use a discount a cash flow valuation method as well so I won't
spend too much time on how I did this calculation I did a whole video on how
to do this calculation where you can get the numbers all of that I even created
an Excel spreadsheet I like a template if you're curious there's a link in the
description below or that video to walk you through how we
did that but basically here's what I did I took analyst estimates from up here
and that's the same numbers we saw in the free cash flow chart from before we
discounted those free cash flow numbers by an 8.5% required rate of return a
perpetual growth rate we projected out using a perpetual growth rate of 2.5%
and ultimately that gave us a fair value of about $110 for fair value of the
company of about $110 per share now once again Lowe's is training at about $120 a
share which would imply that Lowe's this stock is slightly overvalued at this
current level so I think it makes sense to wait for a pullback and loads of
stock before we get involved with it now I'm actually a big fan of Lowe's
business in general and I really like the changes that management is making
and even if loads can get anywhere near the margin levels of Home Depot well I
would expect for I would expect that Lowe's stock has the potential to really
explode but on a personal basis I don't think it makes a lot of sense to overpay
for the company at this point now if you're curious what level is typically a
good level to buy the stock well I actually did a video on looking at the
fair value of the stock and when we use something like discounted cash flow
where we come up with a fair value well is that the place we buy - should we buy
it someplace below that generally we want to add a margin of safety to that
and I did a video called when to buy a stock and that goes into the process
behind when's the best place to buy a stock like this if you're curious about
that well that could be a good next video for you to watch there's a link
here there's a link in the description below and thank you so much for sticking
with me all the way into the video I really appreciate it
thanks and I'll see in the next video