NSI_Lowes_logo_no_taglineLowe’s Companies (NYSE: LOW) came out with earnings this week, yet missed expectations. The market didn’t like this at all and took Lowe’s stock down by 5%. At first glance, the numbers would seem to explain why the market reacted as it did. Yet, if we look deeper, we can see that things are actually pretty great.

Lowe’s delivered first-quarter sales of $14.1 billion, up 5.4% from $13.39 billion last year. The all-important comparable store sales metric increased 5.2%. This is a robust result for same-store numbers in this sector. Remember, we want to look at same-store sales because it gives us a snapshot of how the company’s existing stores did, so that any huge increase or decline in sales from newly opened or closed stores doesn’t affect our perception.

Lowe’s earnings were $673 million, or $0.70 per share, which was up from last year’s $624 million, or $0.61 per share.  That’s a 15% increase in EPS, during a year in which things are good for the housing sector. I have no complaints.

Solid Balance Sheet

Nor do I have complaints about the balance sheet, which carries $1.42 billion in cash and $10.4 billion in long-term debt, accruing interest at only 5%. Another extremely important metric is operating and free cash flow. While Lowe’s doesn’t pump out as much as rival Home Depot (NYSE: HD), it is hardly anything to sneeze at. Operating cash flow was $2.47 billion, and after subtracting capital expenditures, free cash flow was an outstanding $2.15 billion.

I see nothing in these numbers to warrant concern, but because the market always sets up “expectations,” the fact that Lowe’s came in 4 cents below estimates and about $100 million below revenue expectations, the market sold off the stock.

I’m not concerned about these things unless they are part of a trend, which they aren’t. Furthermore, management offered credible explanations for the shortfalls. The first piece has to do with how Lowe’s is positioned geographically compared to Home Depot. In this regard, Home Depot has the advantage by having more stores located in states where the housing recovery has been more robust.

I usually cringe when I hear that the weather affected a business’ results, because I see that as a lame excuse. In this case, however, the long and ugly winter pushed Lowe’s big springtime promotional push out of the first quarter and into the second quarter.

Growing Earnings

In addition, the company said that it isn’t changing its guidance for the year, and still expects about $3.29 in EPS, which is a 22% increase from last year’s $2.70. Finding a stock that isn’t in the tech sector that is growing earnings at that rate is pretty difficult.

What I see here is a fabulous company, with a solid balance sheet, generating tons of free cash flow, in a sector that is experiencing a secular bull market. The fact that Lowe’s stock trades at only 21 times earnings on 22% growth makes it a GARP (growth at a reasonable price) stock.

Those are difficult to find at all, especially in a market I think is overvalued. Lowe’s is a buy, and I think it’s actually cheaper than Home Depot.

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Published by Wyatt Investment Research at