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5. Lowe’s Companies, Inc. (NYSE:LOW)
Number of Hedge Fund Holders: 60
On December 15, Lowe’s Companies, Inc. (NYSE:LOW) announced guidance numbers for the next fiscal year, outlining that it expected total sales of around $95 billion and gross margin rate of more than 33%, up from previous year. Lowe’s Companies, Inc. (NYSE:LOW) also announced share repurchases of around $13 billion for the period. The stock has surged over 55% in the past twelve months based on outstanding operating results and a market shift towards high-quality value plays.
Lowe’s Companies, Inc. (NYSE:LOW) is a leading home improvement retailer and has improved margins this year by 240 basis points even though there has been a significant increase in costs due to supply chain disruptions and rising prices.
Hedge funds remain heavily invested in Lowe’s Companies, Inc. (NYSE:LOW) as it enters 2022. At the end of September, 60 hedge funds in the database of Insider Monkey held stakes worth $5 billion in Lowe’s Companies, Inc. (NYSE:LOW).
In its Q2 2021 investor letter, Pershing Square Holdings, Ltd., an asset management firm, highlighted a few stocks and Lowe’s Companies, Inc. (NYSE:LOW) was one of them. Here is what the fund said:
“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 abovemarket 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 longterm 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 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.”
