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Robert Brooker
Boston, Massachusetts
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| 08/07/2008 9:02 AM |
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I am reconsidering my LOW position based on two red flags.
First, Investor Advisory Service (IAS) discontinued its coverage of LOW. Their rationale is that housing is likely in a protracted slump, and therefore LOW is unlikely to resume its prior identity as a growth company. The IAS analysts probe deeply into each company they cover, participate in the earnings calls, run financial models, etc. While I sometimes make decisions contrary to IAS recommendations, I always find value in considering what IAS says. (And, by the way, I was deeply impressed recently that IAS had found a "sleeper" Philadelphia Holdings and has been recommending it for some time . . . it just got bought out at a 70% premium!).
The second reason for my concern about LOW, as cited by the Barron's article referenced below and other sources, is that LOW's aggressive plans to open new stores seems risky to me. As the article points out (and as I experienced personally with marginal stores, when I was in the retail business), LOW's new stores are much more likely to be second and third players in their markets and more marginal locations.
To the extent that these new stores generate new revenue, but less profitable revenue, this means declining margins and ROE, which is not terrific but not disasterous either. What concerns me is the growing possibility that LOW will overexpand and end up shutting down stores and writing off investments. That really hurts. A good example of this is Starbucks, whose stock study looked great for many years, then boom!
I need to do more analysis and I'm not saying that I'm selling my position. However, LOW is top of my list right now to consider replacing with a more attractive stock.
I'm attaching my stock study. I'm assuming on the downside 5% annual earnings growth and a PE of 8 (which could happen if LOW is unable to grow, the overall market stays weak, and interest rates rise). This would imply a 5-year price of 14 versus current price of 21. Note that this is the downside scenario . . . the upside scenario is that LOW continues strong grwoth, but I call into question the likelihood of that.
http://online.barrons.com/article/SB121790662513812671.html?mod=googlenews_barrons |
 Attachment: LOW.SSG
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