3. Lowe`s Companies Inc (NYSE: LOW)
Two Sigma sold 12% of its existing stake in retailer Lowe’s in the third quarter. The fund now owns 2.65 million shares of the company, worth over $440 million. On Feb. 1, KeyBanc Capital Markets downgraded Lowe’s stock to Sector Weight from Overweight. The firm said in its note that while it remains positive on Lowe’s CEO Marvin Ellison’s transformation of the company operations, it sees risk ahead, especially in the DIY segment. The firm is also concerned about the stock valuation.
A total of 83 hedge funds out of the 816 tracked by Insider Monkey reported having stakes in Lowe’s at the end of the third quarter.
Pershing Square Capital Management said the following about Lowe’s in their Q2 2020 Investor Letter:
“Earlier this year, Lowe’s began to experience a significant acceleration in demand, as U.S. consumers in lock down began to invest more in their homes, which has contributed to Lowe’s year-to-date stock price increase of 40%. In recent months, Lowe’s sales have reflected unprecedented demand across the home improvement sector. Lowe’s has also benefitted from actions taken over the prior year to improve the company’s competitive position, driving additional share gains.
Lowe’s second quarter results reflected extraordinary 35% U.S. comparable sales growth, substantial operating margin expansion, and robust earnings growth. While comparable sales growth has moderated somewhat in recent months, demand patterns continue to be well above historical averages. Although it is difficult to know how much longer the elevated demand environment will persist, we believe the pandemic has provided Lowe’s with a unique opportunity to showcase its improved merchandising, greater in-stock levels, and excellent customer service to a growing base of customers. This should drive greater customer frequency and loyalty, leading to correspondingly higher same-store-sales and profit margins over the long term.
In 2020, beyond adapting the business for surging demand and the associated operational strains imposed by Covid-19, Lowe’s continues to invest behind critical strategic initiatives, including improving omnichannel capabilities. Management completed the re-platforming of its ecommerce platform earlier this year, and will now focus on enhancing online features and functionality, thereby improving the overall user experience. Lowe’s is also accelerating investments in its supply chain initiatives, a critical element of the company’s longer-term business transformation. We believe that Lowe’s continues to make substantial progress toward achieving each of management’s high-priority initiatives, which will aid Lowe’s future competitive position.
In recent quarters, Lowe’s management has begun to acknowledge its medium-term 12% operating margin target as “not the end point,” but rather “a stop along [Lowe’s] journey,” and has further noted that they believe Lowe’s “can do better than that over time.” As Lowe’s revenue productivity and margins begin to approach its best-in-class peer Home Depot, which achieved a greater than 14% profit margin last year, it will generate significant increases in profit, which, when coupled with the company’s likely soon-to-be-relaunched, large share repurchase program should lead to accelerated future earnings-per share growth.
Despite Lowe’s significant stock price appreciation, it currently trades at approximately 19 times our estimate of Lowe’s next-twelve-month earnings (vs. Home Depot at 25 times), a valuation which does not reflect its potential for significant future profit improvement. As a result, we believe that Lowe’s share price has the potential to appreciate substantially as the company continues to make progress on its business transformation.”
