Rule One Investing Blog

The core of Rule one investing is the four M’s. These are meaning, moat, management and margin of safety. As with all companies that you are analyzing for rule one let’s take a look at the four M’s with regards to LOW.

Does the company have meaning to you?

Yes. I often shop at RONA (Canadian equivalent as there isn’t a LOWES in my city yet) . As well, I am interested in starting home renovations in the near future.

Does the company have a moat?

Yes. There are only really two major Home Improvement retailers in the US: Lowes and HomeDepot. This could be compared to a similar Pepsi / Coke comparison as the two major soda makers. Currently Lowes is expanding into the Canadian market. A move that is possibly a little late as HomeDepot and RONA have already established themselves in these markets. So it’ll be interesting the effect that the movement has on companies like Canadiantire.ca, RONA and HomeDepot.

What is the Management like?

Management is always the toughest to analyze. Looking at the financial’s of how much they’re compensated shows that the executives make quite a bit of money a year (over $4 million). This is a quite a large amount of money.

However, are they treating this company like it’s their only asset for the rest of their family? Maybe and maybe Not! The President and CEO have recently just sold approx 270,000 and 107,000 shares each respectively. That’s a lot of shares. The shares were worth $33 and $30 in June and August. Did they know the stock was going to go down to as low as $20 at the start of January?

So we have a high paying CEO and president who’s recently cashed out quite a significant chuck of shares. Should I be worried? Well, they still have over four hundred thousand shares each. As well, this was back in the summer of 07. Maybe they were just taking shares out to start a different business venture or something of that nature. Either way this management kinda scares me as it seems they’re being compensated quite significantly and have sold some shares recently. I’ll be sure to watch and read the annual report quite carefully.

What is the Margin of Safety?

Well, the margin of safety that Phil Town calculated for LOW is $24. I calculate a MOS to be $20. I get these numbers using

• Equity = 14% (near typical growth rate)
• EPS = $1.98
• Future PE = 22 (historical)

That puts the Sticker price between $34.87 – $39.92 per share. I’ll be keeping my eyes on the three tools for Lowes to see when to get out.

If you have any comments or suggestions on my initial analysis of Lowes please leave a comment. I’d be glad to hear your opinion and respond to your thoughts.