COMPANY PROFILE

Lowe's Companies, Inc. (NYSE: LOW) is a FORTUNE® 50 home improvement company serving approximately 20 million customers a week in the United States and Canada. With fiscal year 2020 sales of nearly $90 billion, Lowe's and its related businesses operate or service more than 2,200 home improvement and hardware stores and employ over 300,000 associates. Based in Mooresville, N.C., Lowe's supports the communities it serves through programs focused on creating safe, affordable housing and helping to develop the next generation of skilled trade experts. For more information, visit Lowes.com.

Style Factor Benefits

From a factor scoring perspective versus the other 199 brands in the brands index, here’s where Lowes scores well as of 12/30/21:

• 80% attractive dividend yield

• 88% attractive high dividend growth

• 85% strong price momentum trends

• 81% value opportunities proprietary screen with multiple value metrics

• 87% high ROIC > WACC

• 88% top mega brand via proprietary blended metrics

• 85% top blended MOAT score - a proprietary methodology using multiple factors

• 81% high total sales

Pershing Square’s (Bill Ackman) view on their 10.8% holding in Lowes:

Lowe’s is a high-quality business with significant long-term earnings growth potential. We initiated our investment in the company in April 2018 based on our assessment that the hiring of a new high-caliber management team who would undertake a business transformation could dramatically improve the business and close the performance gap to its closest competitor, Home Depot. Marvin Ellison became CEO in July 2018, and since then, Marvin and his team have executed a multi-year transformation plan to bolster Lowe’s retail fundamentals, reduce structural costs, expand distribution capabilities, and modernize systems and the company’s omnichannel capabilities.

The initial implementation of the transformation plan positioned Lowe’s to deftly react to the demand acceleration following the onset of the COVID-19 pandemic. COVID-19 led existing homeowners to nest at home expanding its utilization to include working from home, home schooling, and a heightened demand for at-home leisure activities. Higher home asset utilization catalyzed more maintenance, repair, and remodel activity. More broadly, the pandemic also initiated a structural change in how people view and invest in their homes. We expect these trends to continue and to inure to the benefit of Lowe’s going forward.

Importantly, while some had questioned whether the increase in demand during the pandemic had simply been a “pull forward,” we believe that industry demand is likely to normalize at a higher baseline. This view is supported by an aging housing stock, a general lack of new inventory, robust home equity values, strong consumer balance sheets, historically low interest rates and a generational shift which is seeing millennial consumers engage in home ownership for the first time. The culmination of these variables has created an unprecedented backlog in professional home improvement projects heading into 2022, which should provide support for the medium-term outlook.

Independent from the accommodative macroeconomic environment, Lowe’s is well positioned to continue to grow earnings- per-share through idiosyncratic opportunities including continued e-commerce improvements, and with a heightened focus and execution on the critically important pro consumer segment. Lowe’s is also positioned to expand margins in 2022 through a multitude of self-help initiatives which should see Lowe’s operating margin approach its current 13% target. Combined with best-in-class capital return, Lowe’s is headed for another year of double-digit earnings-per-share growth.

As Lowe’s continues to execute its multiyear business transformation, we believe the company is well positioned to continue to close the margin gap that exists compared to Home Depot which currently stands at 260 basis points (15.2% for Home Depot vs. Lowe’s at 12.6%). Notably, the company has announced an analyst day in December 2022 during which the company intends to provide an updated roadmap on Lowe’s goal to “substantially close the margin gap” with Home Depot.

The successful execution of Lowe’s continued business transformation should allow the company to generate accelerated double-digit earnings growth for the foreseeable future. Notwithstanding the attractive growth outlook, Lowe’s trades at about 16 times earnings, a low valuation for a business of this quality, and a substantial discount to its direct competitor, Home Depot. We find this valuation disparity to be anomalous in light of Lowe’s strong execution and potential for further operational optimization.

1/3/22 Update

My views on LOW are the same as for Home Depot. The home improvement and home construction industry in the U.S. is one of the most stable in the economy. The U.S. housing stock is old, aging and always in need of minor and major repairs which keeps these great brands performing well and serving customers. Add to that the digitization of their businesses and using technology to allow contractors, builders and consumers to order and re-order easier and you have such loyalty that the MOAT just keeps reinforcing itself. Yes, comps are high after a very strong last few years but for Lowes in particular, valuations are very reasonable, dividend growth is solid and Marvin Ellison, the CEO is a superior operator. The valuation delta between HD and LOW is collapsing and Lowes is getting re-rated toward the HD valuation where it should be. In fact, the stock generally is a better performer than HD even though HD tends to be the first brand you think of in this category. We own both and I don’t see anything changing that. Household formation is just beginning in Millennials and they are buying houses. Gen-X and Millennials are inheriting trillions of dollars from their boomer and silent generation parents and grandparents which will further drive interest in home upgrades and purchases. The future is bright for this sector and these great brands. I will buy them on every dip the market offers.