Here's a The Motley Fool article on the quality of Lowe's (LOW) free cash flow (FCF). Lowe's has produced much more FCF over the past 12 months than net income.
Looking at cash flow can help to gauge the earnings quality of a company but also has its limits. From the article:
All Cash Is Not Equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash comes from high-quality sources. They need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement...
Some of Lowe's current FCF comes down to pulling back on CapEx during the recession. It will be interesting to see what happens as the housing market and economy as a whole improves.
You can see from the chart in the article that FCF was much less than net income from 2006-2009 when they were investing more heavily in store growth. Does that mean they had lower quality FCF in the past? Probably not, but difficult to know as it depends on the long-term return they get from those investments in new stores. Some CapEx maintains and refreshes stores, distribution, and related capabilities while the rest is to expand. They've simply pulled back on the expansion portion for now. Lowe's plans to open ~40-45 new stores this year compared to 115 new stores back in 2008.
I also addressed the FCF (and valuation) of Amazon (AMZN) and eBay (EBAY) in this post from earlier this year.
Check out the full article.
Long position in LOW and EBAY
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