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Lowes Companies Inc. (LOW) Fundamental Valuation using Analyst Forecast Data

I used the Stockcalc website (www.stockcalc.com) to run a fundamental analysis for Lowes Companies (LOW:NYS)

Process:
I ran a Weighted Average Cost of Capital with the WACC Tool
I loaded the Analyst Estimate Data and used it to generate an Income Statement Forecast for 2016 to 2018
I then ran a Discounted Cash Flow with that Data.

The following screens show the steps:

Calculation of WACC for LOW:NYS

Lowes Companies WACC
The weighted average cost of capital for Lowes Companies (LOW:NYS)

This resulted in a WACC value of 8.78 for Lowes Companies Inc.

Next I loaded the Analyst Estimate Data and used it to generate an Income Statement Forecast for 2016 to 2018

LOW Analyst Estimates
Average Analyst Estimates for Lowes Companies Inc. (LOW:NYS)

 

LOW:NYS Income Statement
Income Statement Forecast for Lowes Companies Inc. (LOW:NYS)

 

I then loaded a Discounted Cash Flow using the above inputs

LOW:NYS DCF
Discounted Cash Flow Analysis for Lowes Companies (LOW:NYS)

Note – Stockcalc provides default or historic values to generate the initial valuation calculation- the user can then adjust based on their expectations:

Adjustments:
The cash flow values were taken directly from the Analyst estimates.  I reviewed the historic Capex figures and adjusted the ongoing Capital Expenditures to 0.9 billion from an average of 1.2 billion last 5 years based predominately on the last 2 years figures of 0.9 and 0.8 billion.  I also adjusted the terminal growth rate from the default of 3.0 to 3.4 given the Analyst projection for the next 3 years are 11% growth in EBITDA. These 2 adjustments resulted in a value of $74 per share.  I am not aware if there are redundant assets that would add to  company value.

The Analyst Mean Target Price for 2017 is $80.86.  This can be seen on the Average Analyst Estimates above.  To achieve that value I would need to increase the terminal value to 4.0 % per year in the discounted cash flow model.

Company Information:
Lowe’s Companies Inc. was incorporated in North Carolina in 1952 and has been publicly held since 1961. It is a Fortune(r) 100 company and a home improvement retailer. As of January 31, 2014, Lowe’s operated 1,832 home improvement and hardware stores in the United States, Canada and Mexico representing approximately 200 million square feet of retail selling space. The Company serves homeowners, renters and commercial business customers (Pro customer).

About Stockcalc:
If you would like to explore the Stockcalc website and quickly run valuations like  simply create an account at www.stockcalc.com .  Use the walk-throughs (click the walking man icon), videos (video icon on each page) or the help menu to help navigate the site. The site has a number of tools for data query, backtesting, forecasting and valuation.  We have a no restrictions 14 day free trial available. If you would like the above valuation to test simply send us a note from Stockcalc’s “Contact Us” on the dashboard.

 

 

 

 

How sensitive are companies to rising interest rates?

The talk of will they or won’t they raise rates has been ongoing for more than 2 years now.  We have to expect either rates get raised at some point, we stumble along on the current path or we end up in deflationary times.  I want to explore the more optimistic of these scenarios and its impact on stock valuations: the economy improves and rates start to rise.

To look at this in detail I am using www.stockcalc.com  (Disclaimer: I am the President of Patchell Brook Equity Analytics and we created Stockcalc.com precisely for this type of analysis and valuation)

I will examine Caterpillar as it has with a 59/41 Equity to Debt in the Capital Structure

Using Stockcalc I first create and save a WACC for CAT:  (Research Menu, Valuation, WACC).  Stockcalc does a first pass on WACC using default values which results in a WACC of 8.93.

Cost of Equity (Ke) 13.63 (Using CAPM), After Tax cost of Debt : 2.17, 59% Equity, 41% Debt

 

WACC for CAT

Next I load the Quick DCF tool  so I can run the analysis (Research, Forecast, Analyst) (Note – the quick DCF is a testing and teaching tool, the other tools are more detailed in their analysis)

It is available for free at www.stockcalc.com/dcf.aspx or inside the Stockcalc.Com website

Quick DCF for CAT

Value Per Share ($) Calculations for Caterpillar (CAT:NYS) using the Quick DCF tool on Stockcalc.com

Each change in WACC (8.93 – 9.34 – 9.75) implies a 1 % change in Cost of Debt.  Growth rates are next 3 years and thereafter (5% and 3% in the first row for ex)

WACC 8.93 9.34 9.75
Growth rates 5,3% 70.02 61.28 53.60
Growth rates 6,4% 97.40 84.92 74.21
Growth rates 4,2% 50.55 44.08 38.30

(Current Price at the time of valuation (October 2015) was $69.34)

A 1% change in the Cost of Debt results in a 12.5% change in value per share.  A 1% change in Growth rates results in a 28% change in Value per Share.  A 1% change in WACC results in a similar 28% change in Value per Share.

Message: if interest rates are rising, growth prospects need to be rising at half the rate to keep this share price holding steady.

 

If you want to explore the Stockcalc software simply create an account at www.stockcalc.com and have a look around.  Use the walk-throughs (click the walking man icon), videos (video icon on each page) and  help menu to understand and navigate the site.  The site contains a number of tools including screens, queries, backtests, forecasts and a variety of valuation methods.

 

 

It used to be a 6$ stock…

Checking Price versus Market Cap

I often see on chat rooms and bullboards investors discussing small caps with phrases like “but it used to be a 6 $ stock – I’ll buy it and wait for it to get back there”

Should they be looking at Price or Market Cap?

Price vs Market Cap
Price vs Market Cap

Side note: Here is an overview of Price vs Market cap from Khan Academy:

https://www.khanacademy.org/video/price-and-market-capitalization

In some sectors, notably junior mining companies, you need to look at Market Cap (Stock Price * Number of Shares outstanding) instead of share price as a potential upside if conditions return.  Every time one of these junior companies does a reverse split it affects the market cap but may not be reflected in the price over time given their nature to fall off dramatically in tough times.

As a note, any company that goes through a reverse split falls for this math so if you think of buying a company because it “used to be a 6$ stock” please look to see if any reverse splits have occurred.

Here is a example of a small Canadian junior gold company that I ran using the www.stockcalc.com  website – It hit a high of 12 Million market cap in 2008 and the adjusted stock price at that time was in the 1.20$ range (I say adjusted because as each reverse split occurs in order to have apples and apples the charts need to be adjusted to reflect the splits)

The company is currently trading at 13 cents with a market cap of less than 3.5 million.

Market Cap

BMG Market Cap 2008 2015

Let look at 3 points in time here with the share consolidations accounted for:

Jan 1 2010: Market Cap 5.5 Million, Price 57 cents
Jan 1 2014: Market Cap 1.0 Million, Price 10 cents
Jan 1 2015: Market Cap 3.4 Million, Price 13 cents

From these we can calculate the (adjusted) # of shares as 10 Million each of 2010, 2014 and 26 Million in 2015.  The company did a reverse split mid 2014 followed by a number of private placements.

Price – This chart shows the adjusted close prices for the company from 2008 to mid 2015.

BMG Close price 2008 2015

Here is a zoomed in version of the price chart

BMG Close price 2008 2015 zoomed

So if we wanted to speculate thinking conditions were going to turn around for this junior mining company, how high could the share price go based on historical values?

If we look at the price chart we see the company would have been in the 50 to 60 cent range during 2010-2011 and may speculate it could return there if gold prices reverse higher. This would be a 4-5 times return compared to the 13 cents currently.

Conversely if we look at Market Cap:  after the split Market Cap was 3.4 million. To return to the 5.5 million range we see a  60% return.

i.e if the company returned to full value as expressed by 2010-11 market cap it would only rise to  21 cents, not the 50 to 60 cent range it had seen previously.

Yes it is intuitive, just something to keep on your radar when looking at these smaller stocks.

 

If you want to explore the Stockcalc software simply create an account at www.stockcalc.com and have a look around.  Use the walk-throughs (click the walking man icon), videos (video icon on each page) or the help menu to help understand and navigate the site.