After reporting disappointing quarterly results and trimming its full-year outlook, North Carolina-based home-improvement retailer Lowe's (NYS: LOW) , has now decided to place its bets on a big buyback.
Lowe's will repurchase $5 billion worth of its shares over the next three years, with nearly $2.4 billion of those buys coming this year. It clearly hopes to boost the value of its stock, which has fallen roughly 16% since July. Since the entire company sports a market cap of $25 billion, this is a big deal.
Lowe's has reported declining same-store sales in the first six months of this fiscal year. The company faces stiff competition from the likes of Home Depot (NYS: HD) , which has been steadily eating into its market share. But despite relatively flat top-line growth, it has managed to remain profitable. Let's examine how the company is financially placed to fund the buyback.
The company generated free cash flow of $2.9 billion over the last 12 months, up from $1.7 billion in the year-ago period. However, at the same time, the company's total debt has increased significantly, to $6.62 billion from $5.57 billion last year. Nevertheless, its interest coverage ratio of 14.6 indicates that company will have no problem in paying off its interest obligations, or shelling out for its own shares.
Value and yield
Lowe's may be able to afford this move, but does the buyback make sense? Let's take a look at how the company is valued when compared to its industry peers.
Sears (NAS: SHLD)
Lumber Liquidators (NYS: LL)
Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.
Compared to its peers, Lowe's stock is cheap from both a P/E and a TEV/FCF perspective. Like Home Depot, Lowe's relatively flat growth has caused the market to correctly value its stock cheaply. The buyback could be a smart way to push up the value of Lowe's shares, which have fallen more than 22% since the beginning of the year.
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At the time thisarticle was published Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above.The Motley Fool owns shares of Lumber Liquidators. Motley Fool newsletter services have recommended buying shares of Lumber Liquidators, Home Depot, Lowe's, and Sherwin-Williams. Motley Fool newsletter services have recommended writing covered calls in Lowe's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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