Lowe’s (LOW) is the world’s second-largest home improvement retailer, with sales of $90 billion in FY21, notes Christopher Graja, an analyst with Argus Research, a leading independent Wall Street Research firm.

We believe that CEO Marvin Ellison is demonstrating the experience and ability to improve operations and raise profitability at Lowe’s. The company has improved its business analytics, upgraded its website, and streamlined its Canadian operations, which should lead to market share gains and better margin performance.

Mr. Ellison spent more than a decade improving customer service and efficiency at Home Depot (HD). More recently, he served as CEO of J.C. Penney. We believe his experience in the very difficult department store business gives him a sense of urgency to constantly improve operations at Lowe’s and take nothing for granted.

Among his first moves was to hire David Dentonas as CFO. We have known Mr. Denton for many years going back to his role as CFO of CVS (CVS). He has successfully managed a complex organization, emphasized shareholder-friendly dividend increases and share repurchases, and provided clear financial guidance and objectives. As he did at CVS, he begins his conference call presentation with capital allocation.

Our bullish multi-year thesis is more dependent on business improvement than the macro environment. The company has expressed a commitment to raising the operating margin over a range of sales scenarios and gaining market share by improving merchandising and broadening its product offering.

We believe that the major drivers of post-pandemic sales growth remain the same. There has been significant underinvestment in housing. About 70% of U.S. homes are more than 25 years old and likely in need of upgrades and repairs. Millennials are starting families. Mr. Ellison said on the 1Q22 conference call that the company’s research findings show that the importance of the home will be elevated for many years to come.

The shares are currently trading at 21-times our FY22 estimate and 20-times our FY23 estimate. We believe that LOW is attractive based on the company’s financial strength and our expectations for market-share gains, improving margins and earnings.

Based on our analysis, the shares would be worth approximately $320 using a dividend discount model with our new earnings estimates. Our valuation for Lowe’s reflects our five-year growth rate of 14%, declining to 3% as the business and turnaround mature.

The shares have an indicated dividend yield of about 1.3%. The company has raised its dividend at a 17% annual rate over the last five years and we expect further increases. We have confidence in CEO Ellison’s turnaround plan amid continued strong demand for home improvement products and are raising our target price to $290.

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