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SUMMARY
Parkev Tatevosian, CFA, analyzes Lowe's operational improvements, market share gains, and valuation in the context of the home improvement industry's recent contraction and recovery. He concludes with an increased conviction in Lowe's as a buying opportunity for long-term investors.
MAIN POINTS
- Lowe's is achieving significant operational efficiencies and aims for $1 billion in productivity savings by 2026.
- The pandemic led to a surge in home improvement spending, pulling forward demand and causing a subsequent industry contraction.
- Lowe's has returned to growth with four consecutive quarters of positive comparable sales and annual revenue reaching $88 billion.
- Operating profit margin climbed above 15% in 2023 before declining to 11.5%, with future improvements expected from ongoing cost reductions.
- Lowe's return on invested capital dropped from 32% to 21.27% but is projected to rise due to the introduction of third-party sales on its website.
- Lowe's is considered undervalued at a forward P/E of 16.3 and a fair value estimate of $275, leading to an increased buy conviction.
DETAILED ANALYSIS
Lowe's has focused on operational efficiency as the overall home improvement industry remains flat, targeting $1 billion in productivity savings by 2026. The pandemic period saw a dramatic surge in home improvement spending, as consumers invested in long-lasting projects while confined to their homes, causing industry sales to spike from $72 billion in 2019 to nearly $100 billion. This surge pulled forward demand that would have otherwise occurred in subsequent years, resulting in a contraction for the industry as the pandemic subsided.
Lowe's, along with competitors like Home Depot, experienced this contraction but has since returned to growth, posting four consecutive quarters of positive comparable sales and reaching $88 billion in trailing twelve-month revenue.
Historically, Lowe's has achieved high single-digit revenue growth, and the U.S. home improvement market is projected to approach $1 trillion in annual spending by 2026. Despite recent declines, Lowe's operating profit margin had exceeded 15% in 2023 before falling to 11.5% due to reduced sales, but ongoing cost-cutting initiatives are expected to restore and expand profitability. The company's return on invested capital (ROIC) improved significantly from 10% in 2017 to 32% in 2022, though it has since settled at 21.27%.
A notable strategic shift is Lowe's decision to allow third-party sellers on its website, similar to Amazon's marketplace model. This approach enables Lowe's to benefit from additional inventory and sales commissions without tying up capital in inventory, likely enhancing margins and ROIC, though it introduces trade-offs in product curation and customer experience control.
Valuation metrics indicate that Lowe's is trading at one of its lowest forward price-to-earnings ratios in recent years, at 16.3. Discounted cash flow analysis yields a fair value estimate of $275 per share, compared to a current market price of $218, suggesting the stock is undervalued. Based on these factors, the conviction in Lowe's as a long-term investment opportunity has been increased.
LINKS
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on evaluating publicly traded companies.
- Discount for Fiscal.ai, a primary data source for investment research.
- Webull sign-up link with bonus shares offer.
- Subscription link for Parkev Tatevosian's free monthly newsletter on Substack.
- YouTube channel membership for early access and exclusive perks.