A change in financial policy at Lowe’s
admin | December 14, 2018
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Lowe’s management raises leverage target to fund $10 billion share buyback. Existing debt has widened to Home Depot but may weaken further when new issuance is announced.
Investor conference recap
Management at Lowe’s (LOW) held an investor conference this week where they reiterated recently revised full year guidance as well as provided initial guidance for fiscal 2019. For 2019, total sales are expected to increase 2% while same store sales are expected to be up 3%. In 2018, same store sales are expected to increase approximately 2.5%. Management is looking for the operating margin to grow roughly 235 – 250 bp in 2019. This growth will essentially offset the 240 -255 bp operating margin decline in 2018. Earnings per share will be in the $6.00-$6.10 range, up from the $5.08-$5.13 expected in 2018.
In a bit of an unexpected move, given the ongoing struggles to turnaround the business, management announced that it would be revising the leverage target from 2.25x to 2.75x. Additionally, LOW announced a new $10 billion share repurchase program which adds to the $4.5 billion balance of its previous program. We believe that LOW will use debt to fund its share buybacks and bring leverage closer to the new target level.
Moody’s and S&P Downgrade
Following the conference, Moody’s and S&P downgraded LOW to Baa1 and BBB+, respectively. Both agencies cited the less conservative financial policy, weaker credit metrics and reduced financial flexibility as reasons for the downgrade. As we noted earlier, this change in financial policy comes at a time when the company is investing in its turnaround program and is witnessing margin declines. On a LTM basis, LOW’s EBITDA margin of 11.2% is roughly 530bps lower than HD’s. LOW is expected to end the year with an EBITDA margin of 10.7%, relative to HD’s expectation of 16.4% for the year.
In our Outlook 2019 piece dated December 10, 2018, we had listed LOW 3.1% 5/3/27 bonds as a “pan” as we felt that LOW traded too close to Home Depot (HD) given that margins and profitability have suffered and that the turnaround could take longer than expected. Since the downgrades, LOW bonds have widened about 35 bp and now trade about 51 bp (g-spread) behind HD 3.9% 12/6/28. While we believe the trading differential should be closer to 40 bp (roughly 20 bp per ratings notch) we could see some further pressure on the name ahead of any debt issuance to fund shareholder rewards before spreads start to tighten. In looking at the new leverage target, the company could add roughly $4 billion of additional debt before hitting the target.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.