Shares of Lowe’s Companies (LOW) pulled back today after the home improvement retailer announced plans to buy Rona, a major hardware retailer in Canada. Let’s dig into the details of the report and see whether this is a buying opportunity.
Let’s start with what spooked investors. With a $3.2 billion price tag, the deal will have a short-term impact on Lowe’s generous share repurchase program. Prior to this announcement, Lowe’s was in the process of buying back $5 billion of its stock. In the third quarter alone, Lowe’s repurchased $750 million of its shares.
My long-time readers know that I consider stock buybacks a boon to investors. In this case, I think that the long-term growth potential of this acquisition far outweighs any short-term sacrifice. Once this deal closes, Lowe’s will be the leading home improvement player in Canada. Rona currently operates some 500 stores and nine distribution centers across the country. Lately, Canada has become an attractive market for home improvement retailers, as the country is enjoying a steady housing recovery.
Notably, Lowe’s will keep the majority of Rona’s current employees and its key executives. It will also keep Rona’s headquarters in Quebec. Rona already has a strong presence in Canada, and Lowe’s plans to leverage that experience.
Management expects this deal to have a quick return on investment. Within the first year of this deal closing (which will likely happen in the second half of 2016), it should be accretive to earnings. Over the next five years, management hopes to double operating profitability in Canada.
This acquisition builds upon Lowe’s already strong forecasted sales and earnings. For FY 2016, Lowe’s is expected to post 4.8% annual sales growth and 22.2% earnings growth. This is while the rest of the industry is headed for just 6% annual earnings growth. Add in a 1.6% dividend yield, and its reasonable forward P/E ratio, and I have no problem with recommending LOW. LOW is a buy, earning a B in Portfolio Grader and an A in Dividend Grader.