Lowe’s Companies: Massive Insider Selling, Don’t Ignore The Red Flag

Investment Thesis

With its subsidiaries, Lowe’s Companies, Inc. (NYSE:LOW) runs a home improvement retail business in the US and internationally. Rising interest rates have dampened home construction activity because of the high cost of borrowing money. The historically high inflation rates have also affected consumer confidence by reducing purchasing power. This adds up to what I would call a bleak 2022.

As we move forward to 2023, the industry seems to be facing some serious headwinds that could hurt the performance of this company. It doesn’t look like its finances are in good shape, especially since this year doesn’t look like it will be a good one. I am pessimistic about this company, even though it is trading below its fair value and has an attractive dividend scheme. This is due to the gloomy outlook for the industry as a whole and the increased insider selling, which, in my opinion, demonstrates how less confident the company’s insiders are with LOW stock.

2023 Outlook

Despite widespread media coverage of a potential recession, analysts from ABC, AGC, and Dodge Data & Analytics predict that the United States economy will barely avoid recession in 2023. While these forecasts are encouraging, the construction industry will face challenges in 2023.

What had been a booming property market in early 2022 was stifled by rising mortgage rates. Dodge’s Branch forecasts that the market for single-family homes will bottom out in the second or third quarter of 2023, meaning that this year will carry on in the same dismal vein as the last few months of 2022. The unfavorable effects of remote work are expected to decrease in office buildings in 2023. According to ABC’s Fritz, the sector’s deterioration is likely understated by recent increases in office construction spending (up only.9%).

Headwinds

There are a lot of challenges that the house-building business will face this year, especially in the first half of the year. In my opinion, the industry’s performance will be impacted by these headwinds, leading to a decline in stock prices in the aforementioned sectors. Below are some of the headwinds this industry will face this year.

• Equipment supply chain challenges: According to a recent poll by the Association of Equipment Manufacturers [AEM], nearly all respondents (98%) still face supply chain problems, and almost as many (58%) are seeing supply chain conditions deteriorate. The main issues were a lack of available materials and a skilled labor force. As a whole, respondents in the construction equipment manufacturing sector reported having access to 44% of their ideal inventory.
• High borrowing costs may cancel projects or lower purchasing power: Branch sees high financing rates and growing materials prices as significant challenges. Large infrastructure projects are unlikely to be canceled due to rising costs, although they may require reducing scope from the outset. The Bureau of Labor Statistics reports that from November 2021 to November 2022, the cost of diesel fuel rose by nearly 60%, the cost of architectural coatings like paint rose by 26%, and the cost of asphalt paving mixtures and blocks rose by 19.8% for construction companies. Some commodities’ prices, including steel, copper, lumber, and gasoline, have been dropping in recent months, although they are still high, hurting the industry.
• Persistent labor shortages: Economists from ABC, AGC, and Dodge agree that the construction industry will face ongoing difficulty in attracting and retaining qualified personnel. Simonson claims that contractors should anticipate the labor situation to last far longer than rising material prices or supply problems.

Financial Health

At a time when the prognosis for the sector is particularly grim, LOW’s financial condition appears to be fragile. To begin with, the company has negative shareholder equity in the long run terms.

These figures indicate that the business has to either upgrade its assets or tighten its control over its obligations. The corporation has a debt-to-equity ratio of -256.4%, with debt totaling around $32.9 billion and equity being about -12.86 billion. This is a highly alarming percentage. The most ludicrous aspect of this ratio is that the disparity has been steadily widening since 2017.

A considerable degree of risk is associated with investing in this firm due to its massive debt load.

Dividends

For a very long time, LOW has maintained a stable dividend growth and payout schedule. This company is at the forefront of its field regarding dividend stability, having increased its payout annually for 59 years when the industry average is just one and having paid dividends without missing a beat for 59 years straight while the average is five.

Due to the payout ratio of 27.97% and the sizeable amount held in retained earnings, the dividend is fully covered by earnings. Additionally, the corporation has a strong and manageable cash position of roughly 34%. To sum up, the dividend policy of the corporation is extremely conservative and sustainable.

Valuation

Comparing LOW’s P/E ratio with its peers, the company is significantly undervalued. The company is trading at a P/E ratio of 19.4X compared to the peers’ average of 27.1X.

Wall Street estimates a Fair Price-to-Earnings Ratio of 20.5x for LOW; therefore, the company is offering good value at a P/E of 19.4x. Lastly, LOW stock is trading 22.5% below its fair value of $276.17 with a price share of $214.14. This is the primary point of my claim that LOW is undervalued.

Despite the company’s low market value, 26 analysts agree that it will lose more than 20% of its value over the next year, which brings me to the next point: the massive insider sales.

Insider Selling: Is it a red flag?

Over the past three months, massive insider selling of the corporation has been accompanied by zero buying. As the cause of this is still unknown, it demonstrates, in my opinion, how less optimistic insiders are about the stock’s potential. This occurs as estimates indicate that the company’s share price will fall by more than 20% in the upcoming year.

In the past three months, company insiders have sold 39,470 shares for around $8.2m. This should warn any prospective investors, as I can think of no plausible explanation for such a move.

Conclusion

The gloomy industry outlook diminishes my confidence in LOW, despite the fact that the stock is a solid dividend payer trading at a considerable discount. Furthermore, there has been extensive insider selling, which, in my opinion, portends a future decline in share prices. Therefore, I give the stock a “hold” rating until we learn the major cause for that big insider selling, at which point I will upgrade it to a “buy” rating, but only for dividend-focused investors.