Should I Purchase Lowe’s Stock?

After analyzing Lowe’s financial statement from its 2008 Annual Report, reading articles about changes within the company and observing financial data, investing in Lowe’s stock would be excellent addition to your investment portfolio.

Strengths

According to October 9, 2009, Lowe’s Companies Inc last stock price was 20.94 and the stock change was 0.16 when the market closed. During last week, Lowe’s stock open at 20.57 and closed at 21.01. During the last month, the stock opened at 21.26 and closed at 21.05. Within the last year, Lowe’s stock opened at 18.90 and closed at 21.05. Even though the stock decreased in the last month, the increase in stock price within a week and a year exhibits the short-term and long-term earning power.

As of October 9, 2009, the Net Profit Margin of Lowe’s is higher than the industry average by 1.98. This is an indication of how effective the company is at cost control. Lowe’s is very effective in converting revenue into actual profits; the company’s Net Profit Margin is 5.48.

The current ratio is also a liquidity ratio, which allows investors to compare current assets to current liabilities. Lowe’s current ratio decreased from 1.34 in 2006 to 1.15 in 2009 because current liabilities increased as the current assets increased. Even though the current ratio decreased 19%, 1.15 is an acceptable ratio because the company has more current assets on hand to pay off current liabilities if needed.

The company paid out more dividends and they paid a significant amount of debt within the financing section, this caused the negative amount of net cash flow from financing to decrease tremendously.

Weaknesses

Even though Lowe’s Net Profit Margin is higher than the Industry average, their Return on Equity, Dividend yield, and P/E ratio is lower. Comparing Lowe’s to Home Depot in the graph below, the company falls short in every category.

The table on the next page shows a decline in the acid test ratio for Lowe’s Companies Inc. This indicates a decrease in liquidity, which is the readiness of assets to be converted into cash. Liquidity lets the investor know if the company is able to pay its short-term debt. Lowe’s ability to meet its short-term obligations has declined by 7%. As a result, the company’s assets cannot be converted into cash as quickly as in 2006.

Lowe’s debt to equity ratio as of January 1, 2009 was 0.81. Investors are interested because they want to make a profit from the company’s investments in this financing ratio. Investors want this number to be greater than one.

The cash flow from operations has decrease by $380,000,000 from 2007 because the net income decrease and the funding for the other operating activities are negative. Within the investing section, the capital expenditures increased. The additions to other assets and the disposal of fixed assets decreased causing the negative net cash flow from operating to increase from 2007. The overall cash flow of the company needs improvement because cash flow from in investing and financing is negative.

Recommendation

I encourage you to invest in Lowe’s because it is the second largest global retailer of home improvement products. Lowe’s has a 10-year average annual dividend growth rate of 28%. The company has consistently raised their dividends over time, and has done so again without taking on extra debt. According to Lowe’s Income statement there earnings per share (EPS) was $1.4 at the end of the accounting cycle in 2005. The EPS is estimated to increase to $1.34 in 2011 and to $1.65 in 2012.