Smart Investing


November 2, 2012


Making an investment in post-Sandy cleanup

Now that Superstorm Sandy has left the East Coast, the cleanup efforts will begin. The damage totals are estimated to be around $50 billion, making it the fourth largest behind Hurricane Katrina at $157 billion, 9/11 at $99 billion and Hurricane Andrew at $54 billion.

Investors will now be searching for companies that will benefit from all the government and insurance money that will head to the area. There are many options to choose from, some obvious and some not so obvious. So, I decided to take one of the more obvious companies: Lowe's Companies.

Lowe's trades under the symbol LOW and has a market cap of $38 billion. It is based in Mooresville, N.C., and employs 161,000 people. Home Depot (NYSE: HD), the other obvious choice, has 2,249 stores; Lowe's is not that far behind, with 1,748 stores.

Lowe's stock is pushing its 52-week high of $33.29, well above the 52-week low of $21.21.

I was a little disappointed when I discovered the already high PE of 21.4, slightly above the industry average of 21. I felt a little better seeing a price to sales of 0.73, below the industry average of 1.03, and a price to book value of 2.5, well below the industry average of 4.1. Price to sales looked OK at 11.2 versus the industry at 12.3.

Lowe's pays a 2 percent dividend using only 39 percent of its earnings to pay that decent dividend. Year over year, the sales for Lowe's rose by 4.3 percent, the same as the industry. But something is happening to the earnings growth for Lowe's, rising by only 1.7 percent, well below the industry growth of 16.8 percent.

The balance sheet looked OK with a current ratio of 1.3, just under the industry average of 1.4. The debt to equity also looked OK at 64.8, just slightly higher than the industry at 60.9. The industry does sport a better return on equity than Lowe's, 17.9 percent versus 11.5 percent.

The net profit margin comes in at 3.6 percent for Lowe's, well below the home improvement industry average of 4.9 percent. Lowe's also seems to have a problem, or maybe just needs some work on the inventory control, since the inventory turnover was 3.8.

Looking forward, the mean of 29 analysts is looking for earnings per share of $2.02, with a high estimate of $2.30 and a low estimate of $1.90. Ninety days ago the estimate was $2.23 per share.

The estimates will probably go back up some, but the problem is that with the stock trading around $33 and the current estimate on earnings per share of $2.02, the company is trading at a forward PE of 16.3. I sell my companies when they reach a forward PE of 16.5. If the analysts increase their estimates 10 percent to $2.22, the forward PE would still only be 14.9, leaving a potential gain of only 11 percent growth on the stock. I don’t look at the analysts' price target too often, probably more like not at all, but even their one-year target stands at $31.09. The five-year PEG ratio looked OK at 1.24.

If you are trying to find some companies that will benefit from Sandy, make sure you are investing in companies that will not only see profits rise from the aftermath construction, but that you're also getting a good buy on that company. Be careful not to invest in a company that has a short-term bump up and then two months later falls back to the true value.

Have a question or a company you'd like me to take a look at? Email me at

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


November 2, 2012