3. Lowe’s Companies, Inc. (NYSE:LOW)
Number of Hedge Fund Holders: 60
Lowe’s Companies, Inc. (NYSE:LOW) is an American home improvement retailer, operating its retail outlets in the United States and Canada. Headquartered in North Carolina, supplying home appliances, builders hardware, building materials, plumbing accessories, and housewares. Lowe’s Companies, Inc. (NYSE:LOW) announced on December 15 a share buyback program of $13 billion.
On November 12, Lowe’s Companies, Inc. (NYSE:LOW) declared a $0.80 per share quarterly dividend, in line with previous. The dividend will be distributed on February 2, for shareholders of record on January 9.
Baird analyst Peter Benedict kept an Outperform rating and $285 price target on Lowe’s Companies, Inc. (NYSE:LOW) on January 27. The management “struck a positive tone on current demand”, and although risks around rates and labor productivity bear watching, Lowe’s Companies, Inc. (NYSE:LOW)’s FY22 operating plan offers “more upside than downside”, the analyst tells investors in a research note.
In Q3 2021, 60 hedge funds were long Lowe’s Companies, Inc. (NYSE:LOW), with stakes equaling roughly $5 billion. Bill Ackman’s Pershing Square is the largest Lowe’s Companies, Inc. (NYSE:LOW) stakeholder in the third quarter of 2021, with 10.2 million shares worth more than $2 billion.
Here is what Pershing Square Holdings has to say about Lowe’s Companies, Inc. (NYSE:LOW) in its Q2 2021 investor letter:
“Since the onset of the COVID-19 pandemic, Lowe’s has experienced a significant acceleration in demand driven by consumers nesting at home, higher home asset utilization and the reallocation of discretionary spend. In the three years since Marvin Ellison became CEO, the company has 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 online capabilities. This transformation has allowed Lowe’s to meet consumers’ needs during this highly elevated period of demand, and positioned the company for continued success and accelerated earnings growth.
In the second quarter, Lowe’s reported U.S. same-store-sales growth of 2.2%. Growth was bolstered by strength from the critical Pro consumer, where Lowe’s reported growth of 21%, off setting moderating do-it-yourself (“DIY”) demand. While DIY demand has receded from peak-COVID-19 periods, Pro customer demand has accelerated as consumers engage Pro’s for larger renovation projects.
Notwithstanding the headline growth figure, which is impacted by comparisons to COVID-19-affected months from spring of 2020, demand remains extremely elevated relative to baseline 2019 levels. July same-store-sales, the most recent full month for which the company has provided disclosure, were up 31.5% on a two-year basis and management indicated August month-to-date results are substantially similar. More significantly, Lowe’s reported Pro growth of +49% on a two-year basis in Q2, evidence that Lowe’s focus on the Pro is bearing fruit. Share gains with the critical Pro customer will provide a tailwind to growth that should allow Lowe’s to outperform market-level growth going forward.
Even as the robust demand experienced during the height of COVID-19 stabilizes at a new base, the medium and longer-term macro environment remain very attractive for the home improvement sector and Lowe’s in particular. This favorable context for the sector is evidenced by consumers’ enhanced focus and appreciation of the importance of the home, higher home asset utilization, rising home prices, historically low mortgage rates, an aging housing stock, strong consumer balance sheets, and the general lack of new housing inventory.
Against this backdrop, Lowe’s is focused on taking market share and expanding margins. Pro penetration today is still only 25% of revenue as compared to Lowe’s medium-term target of 30% to 35%, providing a runway for continued above market growth. Management continues to execute against various operational initiatives (Lowe’s “Perpetual Productivity Improvement” program) designed to improve the customer experience while enhancing the company’s margins and long-term earnings power. The company’s long-term outlook implies significant opportunity for continued margin expansion and earnings appreciation as it executes its business transformation.
Lowe’s Companies, Inc. (NYSE:LOW) currently trades at approximately 17 times forward earnings. Home Depot, its closest competitor, trades at approximately 22 times forward earnings despite Lowe’s superior prospective earnings growth. We find this valuation disparity to be anomalous in light of Lowe’s strong execution and potential for further operational optimization.”
