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Applied Portfolio ManagementAnalysts: Elisa Gayle,
Brenna Koch, Jonathan Ramirez
Report Date: 5/7/2012
Market Cap (mm) $37,274 Annual Dividend $0.53 Beta (S&P 500 Index) 0.82
Return on Capital 9.3% Dividend Yield 1.7% Annualized Alpha 18.0% Compared With:
EPS (ttm) $1.44 Price/Earnings (ttm) 21.7 Institutional Ownership 5.9% The Home Depot, Inc.
Current Price $31.09 Economic Value-Added (ttm) $254 Short Interest (% of Shares) 1.6% Wal-Mart Stores Inc.
12-mo. Target Price $31.00 Free Cash Flow Margin 7.9% Days to Cover Short 1.3 and the S&P 500 Index
Business Description
Total Revenue 1.3% Free Cash Flow 139.9%
EBIT -0.4% Total Invested Capital -1.2%
NOPAT 0.0% Total Assets 0.9%
Earnings Per Share -1.4% Economic Value-Added 13.0%
Dividends Per Share 16.5% Market Value-Added 33.1%
2008 2009 2010 2011 2012
9.8% 7.9% 6.8% 7.5% 7.5%
8.6% 7.9% 7.9% 7.2% 7.9%
7.7% 7.4% 4.7% 5.3% 4.6%1.2% 1.6% 1.4% 1.6% 1.7%
2008 2009 2010 2011 2012
1.89 1.50 1.21 1.42 1.44
0.29 0.34 0.36 0.42 0.53
1.99 1.64 1.38 1.62 1.870.29 0.10 1.90 1.97 1.66
Datasource: Capital IQ
Margins and Yields
Operating Margin
Per Share Metrics
Earnings
NOPATFree Cash Flow
Dividends
Free Cash Flow Margin
Earnings YieldDividend Yield
Lowe’s Companies, Inc., together with its subsidiaries, operates as a home
improvement retailer. It offers a range of products for maintenance,
repair, remodeling, and home decorating. The company provides home
improvement products under the categories of appliances, lawn and
landscape, fashion electrical, lumber, building materials, paint, home
fashions, storage and cleaning, rough plumbing, flooring, tools, seasonal
living, millwork, hardware, fashion plumbing, nursery, and cabinets and
countertops, as well as boards, panel products, irrigation pipe, vinyl
siding, and ladders. It also offers installation services through independent
contractors in various product categories. The company serves
Investment Thesis
ANNUALIZED 3-YEAR CAGR
Lowes has been experiencing decreases in net income, EBIT, and EPS
which shows an ineffective use of fundamentals. Even though Lowes’
dividend yield has stayed relatively stable since 2009 the dividend yield
has not risen above 1.9%. After forecasting we see the stock price of
$31 has $12 covered by expected dividends. We also show over-
valuation on the present value of free cash flows model, price to
earnings, price to free cash flow, price to sales, and price to book. With
our macroeconomic call we would expect to see this over-valuation
correct itself within the next few years. After holding the stock for five
years, the stock richly valued given its slow growth and low ROIC thus
we have an opportunity to lock in profits from a long term industry
laggard and recommend a SELL.
Lowe's Companies Inc. Sector: Consumer Discretionary SELLLOW
-30%
-20%
-10%
0%
10%
20%
30% LOW ^SPX
-40% -30% -20% -10%
0% 10% 20% 30% 40% 50%
LOW HD WMT
0
5
10
15
20
25
2007 2008 2009 2010 2011 2012
Price/Earnings Price/Free Cash Flow
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
2007 2008 2009 2010 2011 2012
EBIT Net Operating Profit After Tax
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
-$400 -$200
$0 $200 $400 $600 $800
$1,000 $1,200 $1,400 $1,600
2007 2008 2009 2010 2011 2012
Economic Value-Added Market Valued-Added
0%
5%
10%
15%
20%
25%
2007 2008 2009 2010 2011 2012
ROA ROE ROIC
20 28
LOW DateShare
Price
PRVit Score
(vs Market)
Industry
Median
4-May-12 $31.09 26 46
37
48
LOW 25th 50th 75th % Russell
0.3% -5.3% 0.6% 4.6% 46
0.5% -3.4% 0.7% 4.8% 48
28
LOW 25th 50th 75th % Russell
-0.2% -1.0% 0.6% 2.4% 34
0.0% -0.3% 0.7% 2.2% 30
1.0% -1.9% 0.5% 2.6% 57
12
21
LOW 25th 50th 75th % Russell
28% 36% 46% 57% 9
0.8% 2.0% 4.4% 11.8% 5
42
LOW 25th 50th 75th % Russell
10% 6% 0% -10% 16
13% 54% 23% 11% 72
37% 8% 25% 45% 66
1.8 0.7 1.9 3.5 48
79
61
LOW 25th 50th 75th % Russell
39% -8% 37% 129% 51
71% -7% 30% 117% 66
54
LOW 25th 50th 75th % Russell
8.0 5.5 7.5 10.2 56
22.0 14.6 19.8 27.3 60
35% -13% 20% 62% 61
EVA Spread (EVA/Capital)
PRVit® -- the Performance Risk Valuation investment technologyfrom EVA Dimensions LLC
PRVit® is powered by EVA® and EVA Momentum®,registered marks of EVA Dimensions LLC
LOWE'S COMPANIES INC Specialty RetailPRVit Score(vs Industry)
Lowe's Companies, Inc., together with its subsidiaries, operates as a home improvement retailer. It offers a
range of products for maintenance, repair, remodeling, and home decorating. The company provides home
improvement products under the categories of appliances, lawn and landscape, fashion electrical, lumber,
building materials, paint, home fashions, storage and cleaning, rough plumbing, flooring, tools, seasonal living,
millwork, hardware, fashion plumbing, nursery, and cabinets and countertops, as well as boards, panel products,
irrigation pipe, vinyl siding, and ladders. It also offers installation services through independent contractors in
various product categories. The company serves homeowners and renters consisting of do-it-yourself customers
and do-it-for-me customers; and commercial business customers who work in construction, repair/remodel,
commercial and residential property management, or business maintenance professions. As of February 3, 2012,
it operated 1,745 stores, including 1,712 stores in 50 U.S. states, 31 stores in Canada, and 2 stores in Mexico.
The company also offers its products through Lowes.com. Lowe's Companies, Inc. was founded in 1946 and is
based in Mooresville, North Carolina.
24LOW's weak performance (37th percentile vs. Russell 3000 companies),
coupled with its very low risk (12th percentile), indicates a moderate
intrinsic valuation is warranted (56th percentile), which compared to its
actual market valuation (79th percentile at its $31.09 share price) makes for
a PRVit score of 26th percentile vs. the market.
LOW's PRVit score is at the 24th percentile of all firms in its industry, which
leads to a recommendation to Underweight. LOW is less attractively priced
in relation to its true value than well over half of the stocks in its industry.
Performance Score (P) Higher is better
P1 Profitability Financial strength in generating a return on capital over the full cost
EVA Margin (EVA/Sales)
Stock Price Volatility
P2 Trend The growth rate in the firm's economic profit (its EVA)
EVA Momentum (vs Cap)
3 Year Trend (ΔEVA/Cap)
Last Quarter (ΔEVA/Cap)
Risk Score (R) Lower is better
R1 Volatility Variability in stock price and the EVA profit margin
V1 Wealth Ratios Valuation multiples to book capital (as adjusted)
EVA Margin Variability
R2 Vulnerability Leveraged, negative cash flow firms are suspect
Free Cash Flow Rate
Op Cash Gen Return
Total Debt/Total Capital
Total Debt/EBITDAR
Valuation Score (V) Lower is better
No part of this report may be reproduced or distributed in any form except to authorized licensees of EVA Dimensions LLC Copyright 2010 All Rights Reserved
MVA Margin
MVA Spread
V2 Wealth Multiples Valuation multiples to cash flow, earnings, EVA
EBITDAR Multiple
NOPAT Multiple
Future Growth Reliance
The PRVit Matrix: depicts a company’s PRVit score by plotting its “intrinsic” value score – what PRVit rates the firm is truly
worth based on its risk-adjusted performance, i.e., its comparative P-R score – against its actual valuation score – which
reflects the company’s current trading multiples. Companies rated “Hold” plot along the diagonal, which is where the firms’
actual valuation multiples align with their intrinsic values. “Buys” plot in the upper right green zone, which is where PRVit rates
the firms as worth more than their current share values, and “Sells” appear in the lower left red zone, where the firms’ P-R
scores fall short of their V scores. The top grid rates the firms against the entire market, and the lower one ranks them against
industry peers (which is the basis for the official “PRVit” score).
EVA Dimensions LLC l 15 Watersedge Court l Locust Valley, NY 11560 l Support Hot Line 1.888.500.3560 l [email protected]
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
1/07 1/08 1/09 1/10 1/11 1/12
Sales vs. Capital
Sales Capital
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1/07 1/08 1/09 1/10 1/11 1/12
ROC vs. COC
ROC COC
-$200
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
1/07 1/08 1/09 1/10 1/11 1/12
Market Value Added (MVA) vs. EVA
MVA EVA
0
10
20
30
40
50
60
70
80
90
100
1/07 1/08 1/09 1/10 1/11 1/12
PRVit Scores
Vs Market Vs Industry
LOW
0
20
40
60
80
100
0 20 40 60 80 100
Intr
insic
Va
lue
Vs.
Ru
sse
ll 3
00
0
(P(3
7)-
R(1
2)=
56
th P
erc
en
tile
)
Actual Valuation Vs. Russell 3000
(V=79th Percentile)
LOW PRVit Score Vs Market 26
LOW
0
20
40
60
80
100
0 20 40 60 80 100
Intr
insic
Va
lue
Vs.
Ind
ustr
y
(P(3
1)-
R(4
)=5
2n
d P
erc
en
tile
)
Actual Valuation Vs. Industry
(V=74th Percentile)
LOW PRVit Score Vs Industry 24
Sell 0-19
Underweight 20-39
Hold 40-59
Overweight 60-79
Buy 80-100
Investment Thesis
Concerns regarding the Home Improvement Industry have led us to evaluate LOW which is a current stock in the Washburn University Student Investment Fund.
Even though LOW has maintained stable revenues over the past five years, Net Income, EBIT and EPS have all shown decreases since 2007. This is a large concern for the company’s future profitability.
Gross Profit margin has stayed stable over the past five years (2007-2012), but Operating Profit Margin and Net Profit Margin have both decreased since 2007. OPM dropped from roughly 10% in 2007 to 7.5% in 2012 and Net Profit Margin dropped from roughly 6% in 2007 to 4% in 2012. This illustrates a ineffectiveness of fundamentals.
Since 2009 the dividend yield has been relatively stable, but has not risen above 1.9%. Even though the dividend yield is stable, the level is lower than that desired yield for the Student Investment Fund.
The Macroeconomic call the Applied Portfolio Management class developed calls for an
economic slow-down which would decrease the value of this stock. This stock has
reached a level that would allow for a profitable sale.
Highlights
LOW has been able to maintain a slow long term revenue growth rate of approximately 1.5%.
LOW fiscal analysis stated that Operating Profit was expected to decrease .8% to .9%. The company estimates that .8% of that decrease would be related with store closing and discontinuation of products.
LOW estimated that EPS would decrease to $1.37 from $1.40 for the fiscal year ended February 3, 2012. LOW also indicated that they estimate $.0.20 of the impact would be related to store closings and the discontinuing of products.
LOW has declared a cash dividend since becoming a public company in 1961. Macroeconomic Thesis Consumer spending has been on a decline since 2009 and personal income has also seen a declining trend. LOW struggles under these conditions because most of their products are not considered necessities and are included under the consumer discretionary sector. An economy that is struggling to gain traction combined with the news of a weakening housing market portrays a glim future for LOW.
International Exposure LOW currently has 1712 stores in the United States and recently has begun to expand internationally. LOW has opened several stores in Canada and now has two in Mexico with plans to continue to increase international stores in the future. In 2009, LOW entered into a joint venture with Woolworth limited to development of chains of home improvement stores in Australia. These stores were set to open in late 2011 but not a single store has opened as of now. 1 Year Returns
6 Month Returns
As shown on these four graphs above, LOW stock has been on an overall increasing trend. This upcoming trend can be accredited to a positive outlook on the housing market and reporting higher than expected profits due to a mild winter profit nationwide. However, the company analysis will support the theory that this increasing trend is not guaranteed to continue into the upcoming future.
Industry Presences
Technological Improvements In 2010 LOW made the largest investment in stores technology in the company’s history. This investment should lead to improvements in customer service, such as allowing for free Wi-Fi usage. LOW also made improvements to their website, which has led to a 70% increase in e-commerce sales in the past year. Market Share The home improvement/renovation industry generated approximately $300 billion dollars in 2011. In 2011 LOW generated 50.2 billion dollars in revenue which accounts for 16.7% of the total market share for this industry. LOW is second in market share to HD which generated 70.4 billion in sales in 2011 and has 23.4% of the market share. Low will see an opportunity to increase their market share in the future with Sears declaring bankruptcy. Sears competes with LOW in sales of appliances and hardware which account for 11% and 6% of LOW overall revenue.
Revenue (in billions)
Profit Margin Dividend Yield ROIC
LOW 50.208 3.9% 1.9% 9.5%
HD 70.395 5.6% 2.24% 14.4%
Model Assumptions Our valuation of LOW was done using conservative numbers to assess the value of the company. Our discounted free cash flow model generated a current intrinsic value of $17.24, which indicates that LOW is currently over-valued. Income Statement Inputs
Revenue Growth: Over the last five years LOW has experienced decreases in revenue in 2009 and 2010 of -.1% and -2.1%. This can be attributed to the recession of 2008 which led to a decrease in consumer spending because of a lack of discretionary income. These periods of negative revenue growth led to an average of 1.4% revenue growth over the last 5 years. LOW management forecast revenue growth between 2% and 3%
for the next year and slow long term growth in periods after. So to remain conservative in our forecasting assumptions we have chosen a long-term growth rate of 1.5%.
Net Profit Margin: The NPM average over the past 5 years is 4.4%. Looking at the last three years percentages; we decreased the net margin to 3.8% which is the average from 2010-2012.
Year 2010 2011 2012 2013
Net Profit Margin 3.8% 4.1% 3.7% 3.8%
Share Growth: Recently LOW announced a plan to raise 2 billion dollars in the bond market to repurchase outstanding shares. The plan states that they will buy back shares annually through 2015. LOW had a common share growth rate of -9.3% in 2012 and we expect this level of buyback to remain stable for 2013 and then begin to taper down to a long term buyback rate of -.1%.
Year 2012 2013 2014 2015 2016 2017
Common Share Growth
-9.3% -8% -6% -4% -2% -.1%
Dividend Growth: LOW has declared a dividend since 1961 when they first became a publicly traded company. Over the past 5 years LOW has an average dividend growth rate of 24.1%. This is skewed from 2008 growth rate of 61.1%. Therefore we decreased the forecasted growth rates as follows.
Year 2013 2014 2015 2016 2017
Dividend Growth 20% 15% 10% 5% 3%
This allows for a margin of safety as well as tapering down to what we believe as the perpetual dividend growth.
Financial Analysis Return on Equity (ROE) and Return on Assets (ROA) Return on Assets decreased from 11% in 2007 to 5.5% in 2010. From 2010 to 2012, ROA has stabilized. ROE decreased from 20% in 2007 to 9% in 2010 and then began recovery in 2011 and 2012. These levels are low and have not shown signs of full recovery. Earnings Yield and Dividend Yield The earnings yield decreased from 7.9% in 2008 to less than 5% in 2010. EPS has not shown signs of recovering. The dividends yield is gradually increasing over the past six years; however, the dividend yield has not exceeded 1.9%. The dividend yield has not reached the desired level for the Washburn University Student Investment Fund. Value Creation Metrics Net Operating Profit After Tax and Free Cash Flow NOPAT shows a decrease from year 2008 to 2012. While free cash flow has high volatility with a decreasing trend over the past three years.
Economic Value Added and Market Value Added EVA and MVA have sharp decreases from 2007 to 2009. The Market seemed to over appreciate Lowes stock since the positive trend for MVA began a year before the positive EVA trend. The difference from the two variables has been consistently similar over the past three years showing the growing over evaluation. Value Spread: ROIC to WACC One of the major contributions to evaluating value creation is determining the ROIC to WACC Spread. Return on Invested Capital (ROIC) and ROIC to WACC spread. ROIC decreased from 15% in 2007 to about 7% in 2010. In 2011 and 2012 ROIC has stabilized to around 9.3%. With a WASS of 8.3, ROIC-WACC Spread is 1%. This spread is very small and does not contribute a great deal to the value creation process.
Weighted Average Cost of Capital (WACC) Assumptions A WACC of 8.3% was calculated using.
Short term debt cost of 2.27%
Long term growth rate of 2.0%
Cost of Equity of 9.3% was calculated using:
o Risk Free Rate of 2.27%
o Market risk premium of 7.0%
o Beta of 1.0
Other Analyst Recommendation These results were derived from the performance risk valuation investment theory which is provided by EVA Dimensions LLC. The PRVit Scores are used to further strengthen our understanding of the Lowes stock prices, versus their value potential. We conclude that this method also matches our finding that Lowes stock is significantly over valued.
When comparing LOW’s stock versus the industry average we conclude the actual valuation is within the 80th percentile. This indicates significant overvaluation. On the vertical axis the intrinsic value of LOW’s stock is compared to the industry’s average intrinsic value. LOW’s stock is in the 54th percentile showing it has average intrinsic value for the industry. After intersecting the values we can see it is below the line indicating a sell recommendation.
Financial Stability
Since 2009, LOW stock has become increasingly overvalued.
Looking at the Dividend Discount Model, the Intrinsic Value of the Dividends account for $12.15 of the $31.09 of the stock. This impact on the valuation will be shown on the recommendation summary of the report. If the stock was purchased today at $31.09 the expected return on the stock, based on the dividend stream alone, would be -14.8%.
Recommendation Summary Due to LOW’s over evaluation in all of our models, decreasing net income, EBIT and EPS we rate LOW as a SELL stock for the Student Investment Fund.
Over evaluation for the dividend discount model shows this stock is not performing above average in dividends and we can see this confirmed by noting the 1.7% dividend yield. The dividend yield has never increased above 1.9% since 2009. This is not ideal for the student investment fund.
LOW is over evaluated for the present value of free cash flows model which concludes the expected income is less than what is needed to support the stock price.
When LOW stock price is compared to earnings, free cash flow, sales and to book value it is consistently over-valued.
The Macroeconomic call the Applied Portfolio Management class developed calls for an economic slow-down which would decrease the value of this stock.
Lowe's Companies Inc. LOW Sector Consumer Discretionary Stock Price $31.09 Report Date 5/7/2012
2007 2008 2009 2010 2011 2012 ASSETS 2007 2008 2009 2010 2011 2012
Total Revenue 46,927 48,283 48,230 47,220 48,815 50,208 Cash and Equivalents 364 281 245 632 652 1,014
Cost of Goods Sold 30,729 31,556 31,729 30,757 31,663 32,858 Short-Term Investments 184 82 416 425 471 286
Gross Profit 16,198 16,727 16,501 16,463 17,152 17,350 Total Cash & ST Invest. 548 363 661 1,057 1,123 1,300
SG&A Expense 9,879 10,628 11,155 11,623 11,925 12,107 Total Receivables 0 0 0 0 0 0
R&D Expense 0 0 0 0 0 0 Inventory 7,144 7,611 8,209 8,249 8,321 8,355
Dep. & Amort. 1,162 1,366 1,539 1,614 1,586 1,480 Prepaid Expenses 0 0 0 0 0 0
Other Oper. Exp. 41,770 43,550 44,423 43,994 45,174 46,445 Total Current Assets 8,314 8,686 9,190 9,732 9,967 10,072
Operating Income 5,157 4,733 3,807 3,226 3,641 3,763 Gross PPE 25,104 28,836 31,477 32,268 33,345 34,332
Interest Expense (206) (239) (320) (304) (344) (383) Accumulated Depr. (6,133) (7,475) (8,755) (9,769) (11,256) (12,362)
Other Non-Oper. Exp. 0 0 0 0 0 0 Net PPE 18,971 21,361 22,722 22,499 22,089 21,970
EBT ex-Unusuals 5,003 4,539 3,527 2,939 3,309 3,392 Long-Term Investments 133 337 110 75 748 242
Total Unusual Exp. (5) (28) (21) (114) (81) (486) Goodwill 0 0 0 0 0 0
Earnings Before Tax 4,998 4,511 3,506 2,825 3,228 2,906 Total Assets 27,767 30,869 32,625 33,005 33,699 33,559
Income Tax Expense 1,893 1,702 1,311 1,042 1,218 1,067 LIABILITIES AND EQUITY
Net Income 3,105 2,809 2,195 1,783 2,010 1,839 Accounts Payable 3,524 3,713 4,109 4,287 4,351 4,352
Accrued Expenses 1,075 1,138 434 1,213 1,318 1,317
Diluted EPS 1.99 1.86 1.49 1.21 1.42 1.43 Short-Term Debt 23 1,064 987 0 0 0
Total Diluted Shares 1,566 1,507 1,468 1,464 1,403 1,273 Total Current Liab. 6,539 7,751 7,560 7,355 7,119 7,891
Dividends Per Share 0.18 0.29 0.34 0.36 0.42 0.53 Long-Term Debt 4,325 5,576 5,039 4,528 6,537 6,669
Pension Benefits 0 0 0 0 0 0
Effective Tax Rate 37.9% 37.7% 37.4% 37.4% 37.7% 36.7% Total Liabilities 12,042 14,771 14,570 13,936 15,587 17,026
Earnings Per Share 2.02 1.89 1.50 1.21 1.42 1.44 Preferred Equity 0 0 0 0 0 0
Total Common Shares 1,535 1,481 1,457 1,462 1,401 1,271 Common Stock & APIC 864 745 1,012 735 688 635
EBITDA 6,394 6,197 5,474 4,959 5,325 5,342 Retained Earnings 14,860 15,345 17,049 18,307 17,371 15,852
EBIT 5,157 4,733 3,807 3,226 3,641 3,763 Treasury Stock 0 0 0 0 0 0
EBITDAR 6,712 6,566 5,873 5,369 5,727 5,752 Total Common Equity 15,725 16,098 18,055 19,069 18,112 16,533
Free Cash Flow/Share 2.82 2.80 2.62 2.56 2.52 3.14 Total Equity 15,725 16,098 18,055 19,069 18,112 16,533
Year-end Stock Price $31.61 $24.53 $20.32 $25.63 $26.82 $31.09 Total Liab. and Equity 27,767 30,869 32,625 33,005 33,699 33,559
Historical Income Statements Historical Balance Sheets
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
2007 2008 2009 2010 2011 2012
Total Revenue Net Income
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
2007 2008 2009 2010 2011 2012
Earnings Per Share Dividends Per Share
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
2007 2008 2009 2010 2011 2012
EBITDA EBIT
LOW Performance Analysis. Datasource: CapitalIQ Historical Performance, Page 1 of 4 Analysts: Elisa Gayle, Brenna Koch, Jonathan Ramirez
Margins 2007 2008 2009 2010 2011 2012 Relative Valuation 2007 2008 2009 2010 2011 2012
Gross Profit Margin 34.5% 34.6% 34.2% 34.9% 35.1% 34.6% Price/Earnings 15.6 13.0 13.6 21.2 18.9 21.7
Operating Profit Margin 11.0% 9.8% 7.9% 6.8% 7.5% 7.5% Price/Book 1.7 1.2 0.9 1.1 1.1 1.2
Net Profit Margin 6.6% 5.8% 4.6% 3.8% 4.1% 3.7% Price/Free Cash Flow 11.2 8.8 7.8 10.0 10.6 9.9
Free Cash Flow Margin 9.2% 8.6% 7.9% 7.9% 7.2% 7.9% Earnings Yield 6.4% 7.7% 7.4% 4.7% 5.3% 4.6%
Dividend Yield 0.6% 1.2% 1.6% 1.4% 1.6% 1.7%
Liquidity and Debt 2007 2008 2009 2010 2011 2012 Profitability 2007 2008 2009 2010 2011 2012
Current Ratio 1.27 1.12 1.22 1.32 1.40 1.28 Net Profit Margin 6.6% 5.8% 4.6% 3.8% 4.1% 3.7%
Quick Ratio 0.18 0.14 0.13 0.20 0.23 0.22 Total Asset Turnover 1.69 1.56 1.48 1.43 1.45 1.50
Days Sales Outstanding 0.00 0.00 0.00 0.00 0.00 0.00 Equity Multiplier 1.77 1.92 1.81 1.73 1.86 2.03
Inventory Turnover 6.57 6.34 5.88 5.72 5.87 6.01 Return on Assets 11.2% 9.1% 6.7% 5.4% 6.0% 5.5%
Long-Term Debt to Equity 27.5% 34.6% 27.9% 23.7% 36.1% 40.3% Return on Equity 19.7% 17.4% 12.2% 9.4% 11.1% 11.1%
Total Debt to Assets 15.7% 21.5% 18.5% 13.7% 19.4% 19.9% Return on Invested Capital 14.6% 12.1% 8.9% 7.8% 8.9% 9.3%
Times Interest Earned 25.03 19.80 11.90 10.61 10.58 9.83
5
5
6
6
6
6
6
7
7
0
0
0
1
1
1
2007 2008 2009 2010 2011 2012
Days Sales Outstanding Inventory Turnover
0.0
0.1
0.1
0.2
0.2
0.3
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2007 2008 2009 2010 2011 2012
Current Ratio Quick Ratio
0%
5%
10%
15%
20%
25%
30%
35%
40%
2007 2008 2009 2010 2011 2012
Gross Profit Margin Operating Profit Margin
0
5
10
15
20
25
2007 2008 2009 2010 2011 2012
Price/Earnings Price/Free Cash Flow
0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
2007 2008 2009 2010 2011 2012
Earnings Yield Dividend Yield
0% 5%
10% 15% 20% 25% 30% 35% 40% 45%
2007 2008 2009 2010 2011 2012
Total Debt to Assets Long-Term Debt to Equity
0%
5%
10%
15%
20%
25%
2007 2008 2009 2010 2011 2012
ROA ROE ROIC
1.5
1.6
1.7
1.8
1.9
2.0
2.1
1.30 1.35 1.40 1.45 1.50 1.55 1.60 1.65 1.70 1.75
2007 2008 2009 2010 2011 2012
Total Asset Turnover Equity Multiplier
0%
2%
4%
6%
8%
10%
2007 2008 2009 2010 2011 2012
Net Profit Margin Free Cash Flow Margin
LOW Performance Analysis. Datasource: CapitalIQ Historical Performance, Page 2 of 4 Analysts: Elisa Gayle, Brenna Koch, Jonathan Ramirez
Capital, NOPAT & FCF 2007 2008 2009 2010 2011 2012
Net Oper. Working Capital 2,909 3,041 3,911 3,381 3,304 3,700
Net Fixed Assets 18,971 21,361 22,722 22,499 22,089 21,970
Total Invested Capital 21,880 24,402 26,633 25,880 25,393 25,670
Net Oper. Profit After Tax 3,204 2,947 2,383 2,020 2,267 2,381
Free Cash Flow N/A 425 152 2,773 2,754 2,104
Compared With: NOPAT Per Share 2.09 1.99 1.64 1.38 1.62 1.87
The Home Depot, Inc. Free Cash Flow Per Share N/A 0.29 0.10 1.90 1.97 1.66
Wal-Mart Stores Inc. Return on Invested Capital 14.6% 12.1% 8.9% 7.8% 8.9% 9.3%
S&P 500 Index
Cost of Capital 2012 Weight % Cost Wgt Cost Value Creation 2007 2008 2009 2010 2011 2012
Equity Capitalization 37,274 84.8% 9.3% 7.9% Economic Value-Added 1,390 925 176 -126 162 254
Total Debt 6,669 15.2% 4.5% 0.4% Market Valued-Added 36,278 21,272 8,792 12,800 16,733 20,741
Preferred Stock 0 0.0% 0.0% 0.0% PV of Future FCFs 27,250 29,083 31,341 31,167 30,996 31,461
Value of All Securities 43,943 100.0% Value of Non-Oper. Assets 548 363 661 1,057 1,123 1,300
Effective Tax Rate 36.7% Long-Term Growth Rate: Total Intrinsic Firm Value 27,798 29,446 32,002 32,224 32,119 32,761
Risk-Free Rate 2.27% 1.5% Intrinsic Value of Equity 23,450 22,806 25,976 27,696 25,582 26,092
Beta 1.00 Alternative Beta: Per Share Intrinsic Value $14.97 $15.13 $17.70 $18.92 $18.23 $20.50
Market Risk Premium 7.0% Year-End Stock Price $31.61 $24.53 $20.32 $25.63 $26.82 $31.09
CAPM Cost of Equity 9.3% Over (Under) Valuation/Sh $16.64 $9.40 $2.62 $6.71 $8.59 $10.59
Weighted Average Cost of Capital: 8.3% % Over (Under) Valued 52.6% 38.3% 12.9% 26.2% 32.0% 34.1%
6.4% 3.8% 0.7% -0.5% 0.6% 1.0%
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
2007 2008 2009 2010 2011 2012
Net Fixed Assets Total Invested Capital
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
2008 2009 2010 2011 2012
Net Oper. Profit After Tax Free Cash Flow
$0
$5
$10
$15
$20
$25
$30
$35
2007 2008 2009 2010 2011 2012
Year-End Stock Price Per Share Intrinsic Value
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
-400 -200
0 200 400 600 800
1,000 1,200 1,400 1,600
2007 2008 2009 2010 2011 2012
Economic Value-Added Market Valued-Added
0%
10%
20%
30%
40%
50%
60%
$0 $2 $4 $6 $8
$10 $12 $14 $16 $18
2007 2008 2009 2010 2011 2012
Over (Under) Valuation/Sh % Over (Under) Valued
-40% -30% -20% -10%
0% 10% 20% 30% 40% 50%
LOW HD WMT
-30%
-20%
-10%
0%
10%
20%
30% LOW ^SPX
LOW Performance Analysis. Datasource: CapitalIQ Historical Performance, Page 3 of 4 Analysts: Elisa Gayle, Brenna Koch, Jonathan Ramirez
Revenues, Profits and Dividends 20.0% Liquidity and Debt 10.0%
Total Revenue 0 Current Ratio 0
EBITDA 0 Quick Ratio 1
EPS -1 Days Sales Outstanding 0
DPS 1 Inventory Turnover 1
Gross, Operating and Net Margins 15.0% Total Debt/Assets 0
Gross Profit Margin 0 Long-Term Debt/Equity -1
Operating Profit Margin -1 NOPAT, Total Invested Capital, FCF 15.0%
Net Profit Margin -1 NOPAT -1
Free Cash Flow Margin 0 Total Invested Capital 1
Relative Valuation 15.0% Free Cash Flow -1
Price/Earnings 0 Value Creation 15.0%
Price/Free Cash Flow 0 Economic Value-Added -1
Earnings Yield -1 Market Value-Added 1
Dividend Yield 1 Intrinsic Value -1
Profitability 10.0%
ROA -1 Score (max = 100%) -25.8%
ROE -1
ROIC -1
Weights 100.0%
Historical Performance Diffusion Index
LOW Performance Analysis. Datasource: CapitalIQ Historical Performance, Page 4 of 4 Analysts: Elisa Gayle, Brenna Koch, Jonathan Ramirez
LOW Lowe's Companies Inc. Sector Consumer Discretionary
2007 2008 2009 2010 2011 2012 Average Manual 2013E 2014E 2015E 2016E 2017E
Total Revenue 46,927 48,283 48,230 47,220 48,815 50,208 1.4% N/A 51,212 52,134 52,968 53,763 54,569
Cost of Goods Sold 30,729 31,556 31,729 30,757 31,663 32,858
Gross Profit 16,198 16,727 16,501 16,463 17,152 17,350 34.7% N/A 17,762 18,082 18,371 18,646 18,926
SG&A Expense 9,879 10,628 11,155 11,623 11,925 12,107
R&D Expense 0 0 0 0 0 0
Dep. & Amort. 1,162 1,366 1,539 1,614 1,586 1,480
Other Oper. Exp. 41,770 43,550 44,423 43,994 45,174 46,445
Operating Income 5,157 4,733 3,807 3,226 3,641 3,763 7.9% N/A 4,044 4,117 4,183 4,245 4,309
Net Interest Expense (154) (194) (280) (287) (332) (371)
Other Non-Oper. Exp. 0 0 0 0 0 0
EBT ex-Unusuals 5,003 4,539 3,527 2,939 3,309 3,392
Total Unusual Exp. (5) (28) (21) (114) (81) (486)
Earnings Before Tax 4,998 4,511 3,506 2,825 3,228 2,906
Income Tax Expense 1,893 1,702 1,311 1,042 1,218 1,067
Net Income 3,105 2,809 2,195 1,783 2,010 1,839 4.4% 3.7% 1,895 1,929 1,960 1,989 2,019
Basic EPS 2.02 1.89 1.50 1.21 1.42 1.44 1.62 1.75 1.86 1.92 1.95
Total Common Shares 1,535 1,481 1,457 1,462 1,401 1,271 -3.7% N/A 1,169 1,099 1,055 1,034 1,034
Dividends Per Share 0.18 0.29 0.34 0.36 0.42 0.53 24.1% N/A 0.64 0.73 0.80 0.84 0.87
2008 2009 2010 2011 2012 Average Manual 2013E 2014E 2015E 2016E 2017E
1. Revenue Growth 2.9% -0.1% -2.1% 3.4% 2.9% 1.4% 2.0% 1.8% 1.6% 1.5% 1.5%
2. Gross Margin 34.6% 34.2% 34.9% 35.1% 34.6% 34.7%
3. Operating Margin 9.8% 7.9% 6.8% 7.5% 7.5% 7.9%
4. Net Margin 5.8% 4.6% 3.8% 4.1% 3.7% 4.4% 3.7%
5. Common Shares Growth -3.5% -1.6% 0.3% -4.2% -9.3% -3.7% -8.0% -6.0% -4.0% -2.0% -0.1%
6. Dividend Growth 61.1% 15.5% 6.0% 18.3% 26.2% 24.1% 20.0% 15.0% 10.0% 5.0% 3.0%
4. Net Income 5. Total Common Shares 6. Dividends Per Share
Historical Growth and Margins Forecast Defaults to Historical Avg. User Can Enter 1 Manual Avg. or Year-by-Year Values
1. Total Revenue 2. Gross Profit 3. Operating Income
$40,000
$45,000
$50,000
$55,000
$14,000
$16,000
$18,000
$20,000
$0
$2,000
$4,000
$6,000
$0
$1,000
$2,000
$3,000
$4,000
$0.00
$0.50
$1.00
0
500
1,000
1,500
2,000
LOW Performance Analysis. Datasource: CapitalIQ Income Statement Forecast, Page 1 of 1 Analysts: Elisa Gayle, Brenna Koch, Jonathan Ramirez
LOW Lowe's Companies Inc. Sector Consumer Discretionary
ASSETS 2007 2008 2009 2010 2011 2012 Average Manual 2013E 2014E 2015E 2016E 2017E
Cash and Equivalents 364 281 245 632 652 1,014 1.2% N/A 592 603 613 622 631
Short-Term Investments 184 82 416 425 471 286
Total Cash & ST Invest. 548 363 661 1,057 1,123 1,300
Total Receivables 0 0 0 0 0 0 0.0% N/A 0 0 0 0 0
Inventory 7,144 7,611 8,209 8,249 8,321 8,355 16.8% N/A 8,597 8,752 8,892 9,026 9,161
Prepaid Expenses 0 0 0 0 0 0
Total Current Assets 8,314 8,686 9,190 9,732 9,967 10,072 19.6% N/A 10,051 10,232 10,396 10,552 10,710
Gross PPE 25,104 28,836 31,477 32,268 33,345 34,332
Accumulated Depr. (6,133) (7,475) (8,755) (9,769) (11,256) (12,362)
Net PPE 18,971 21,361 22,722 22,499 22,089 21,970 45.6% N/A 23,354 23,774 24,154 24,517 24,884
Long-Term Investments 133 337 110 75 748 242
Goodwill 0 0 0 0 0 0
Total Assets 27,767 30,869 32,625 33,005 33,699 33,559 67.5% N/A 34,553 35,175 35,737 36,273 36,818
LIABILITIES AND EQUITY 4,599 4,851 4,543 5,500 5,669 5,669
Accounts Payable 3,524 3,713 4,109 4,287 4,351 4,352 Note: Forecasting Payables + Accruals together in row 19 below
Accrued Expenses 1,075 1,138 434 1,213 1,318 1,317 10.8% N/A 5,533 5,632 5,722 5,808 5,895
Short-Term Debt 23 1,064 987 0 0 0
Total Current Liabilities 6,539 7,751 7,560 7,355 7,119 7,891 15.5% N/A 7,949 8,092 8,221 8,344 8,470
Long-Term Debt 4,325 5,576 5,039 4,528 6,537 6,669 12.5% N/A 6,403 6,518 6,622 6,721 6,822
Pension Benefits 0 0 0 0 0 0 4,348 6,640 6,026 4,528 6,537 6,669
Total Liabilities 12,042 14,771 14,570 13,936 15,587 17,026 Note: Forecasting ST Debt + LT Debt together in row 22 above
Preferred Equity 0 0 0 0 0 0
Common Stock & APIC 864 745 1,012 735 688 635
Retained Earnings 14,860 15,345 17,049 18,307 17,371 15,852
Treasury Stock 0 0 0 0 0 0
Total Common Equity 15,725 16,098 18,055 19,069 18,112 16,533
Total Equity 15,725 16,098 18,055 19,069 18,112 16,533 36.2% N/A 18,558 18,893 19,195 19,483 19,775
Total Liab. and Equity 27,767 30,869 32,625 33,005 33,699 33,559
2008 2009 2010 2011 2012 Average Manual 2013E 2014E 2015E 2016E 2017E
1. Cash and Equivalents 0.6% 0.5% 1.3% 1.3% 2.0% 1.2%
2. Total Receivables 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
3. Inventory 15.8% 17.0% 17.5% 17.0% 16.6% 16.8%
Percent of Sales Forecast Defaults to Historical Avg. User Can Enter 1 Manual Avg. or Year-by-Year Values
2. Total Receivables1. Cash and Equivalents 3. Inventory
$0
$500
$1,000
$1,500
$0
$1
$1
$0
$2,000
$4,000
$6,000
$8,000
$10,000
LOW Performance Analysis. Datasource: CapitalIQ Balance Sheet Forecast, Page 1 of 2 Analysts: Elisa Gayle, Brenna Koch, Jonathan Ramirez
2008 2009 2010 2011 2012 Average Manual 2013E 2014E 2015E 2016E 2017E
4. Total Current Assets 18.0% 19.1% 20.6% 20.4% 20.1% 19.6%
5. Net PPE 44.2% 47.1% 47.6% 45.3% 43.8% 45.6%
6. Total Assets 63.9% 67.6% 69.9% 69.0% 66.8% 67.5%
7. Payables and Accruals 10.0% 9.4% 11.6% 11.6% 11.3% 10.8%
8. Total Current Liabilities 16.1% 15.7% 15.6% 14.6% 15.7% 15.5%
9. Total Debt 13.8% 12.5% 9.6% 13.4% 13.3% 12.5%
10. Total Equity 33.3% 37.4% 40.4% 37.1% 32.9% 36.2%
4. Total Current Assets 5. Net PPE 6. Total Assets
Percent of Sales Forecast Defaults to Historical Avg. User Can Enter 1 Manual Avg. or Year-by-Year Values
7. Payables and Accruals 8. Total Current Liabilities 9. Total Debt
10. Total Equity
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$0
$10,000
$20,000
$30,000
$40,000
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$0
$2,000
$4,000
$6,000
$0
$2,000
$4,000
$6,000
$8,000
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$0
$5,000
$10,000
$15,000
$20,000
LOW Performance Analysis. Datasource: CapitalIQ Balance Sheet Forecast, Page 2 of 2 Analysts: Elisa Gayle, Brenna Koch, Jonathan Ramirez
LOW Lowe's Companies Inc. Sector Consumer Discretionary Report Date 5/7/2012 2007
2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Total Revenue 46,927 48,283 48,230 47,220 48,815 50,208 51,212 52,134 52,968 53,763 54,569
Gross Profit 16,198 16,727 16,501 16,463 17,152 17,350 17,762 18,082 18,371 18,646 18,926
Operating Income 5,157 4,733 3,807 3,226 3,641 3,763 4,044 4,117 4,183 4,245 4,309
Net Income 3,105 2,809 2,195 1,783 2,010 1,839 1,895 1,929 1,960 1,989 2,019
Retained Earnings 14,860 15,345 17,049 18,307 17,371 15,852 17,003 18,128 19,239 20,355 21,474
Total Common Shares 1,535 1,481 1,457 1,462 1,401 1,271 1,169 1,099 1,055 1,034 1,034
Total Diluted Shares 1,566 1,507 1,468 1,464 1,403 1,273 1,171 1,101 1,057 1,036 1,035
Earnings Per Share $2.02 $1.90 $1.51 $1.22 $1.43 $1.45 $1.62 $1.75 $1.86 $1.92 $1.95
Dividends Per Share $0.18 $0.29 $0.34 $0.36 $0.42 $0.53 $0.64 $0.73 $0.80 $0.84 $0.87
2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Cash and Equivalents 364 281 245 632 652 1,014 592 603 613 622 631
Total Receivables 0 0 0 0 0 0 0 0 0 0 0
Inventory 7,144 7,611 8,209 8,249 8,321 8,355 8,597 8,752 8,892 9,026 9,161
Total Current Assets 8,314 8,686 9,190 9,732 9,967 10,072 10,051 10,232 10,396 10,552 10,710
Net PPE 18,971 21,361 22,722 22,499 22,089 21,970 23,354 23,774 24,154 24,517 24,884
Total Assets 27,767 30,869 32,625 33,005 33,699 33,559 34,553 35,175 35,737 36,273 36,818
Payables and Accruals 4,599 4,851 4,543 5,500 5,669 5,669 5,533 5,632 5,722 5,808 5,895
Total Current Liabilities 6,539 7,751 7,560 7,355 7,119 7,891 7,949 8,092 8,221 8,344 8,470
Total Debt 4,348 6,640 6,026 4,528 6,537 6,669 6,403 6,518 6,622 6,721 6,822
Total Equity 15,725 16,098 18,055 19,069 18,112 16,533 18,558 18,893 19,195 19,483 19,775
Historical Income Statement Highlights Forecasted Income Statement Highlights
Historical Balance Sheet Highlights Forecasted Balance Sheet Highlights
$42,000
$44,000
$46,000
$48,000
$50,000
$52,000
$54,000
$56,000
Total Revenue
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
Net Income
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
Total Current Assets Cash and Equivalents
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
0
5,000
10,000
15,000
20,000
25,000
Total Equity Total Debt
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
Earnings Per Share Dividends Per Share
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
Total Assets Net PPE
LOW Performance Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 1 of 5 Analysts: Elisa Gayle, Brenna Koch, Jonathan Ramirez
Margins 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Gross Profit Margin 34.5% 34.6% 34.2% 34.9% 35.1% 34.6% 34.7% 34.7% 34.7% 34.7% 34.7%
Operating Profit Margin 11.0% 9.8% 7.9% 6.8% 7.5% 7.5% 7.9% 7.9% 7.9% 7.9% 7.9%
Net Profit Margin 6.6% 5.8% 4.6% 3.8% 4.1% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7%
Free Cash Flow Margin 9.2% 0.9% 0.3% 5.9% 5.6% 4.2% 2.4% 4.1% 4.2% 4.2% 4.2%
Liquidity and Debt 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Days Sales Outstanding 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Inventory Turnover 6.57 6.34 5.88 5.72 5.87 6.01 5.96 5.96 5.96 5.96 5.96
Total Debt to Equity 27.7% 41.2% 33.4% 23.7% 36.1% 40.3% 34.5% 34.5% 34.5% 34.5% 34.5%
Total Debt to Assets 15.7% 21.5% 18.5% 13.7% 19.4% 19.9% 18.5% 18.5% 18.5% 18.5% 18.5%
Profitability 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Total Asset Turnover 1.69 1.56 1.48 1.43 1.45 1.50 1.48 1.48 1.48 1.48 1.48
Equity Multiplier 1.77 1.92 1.81 1.73 1.86 2.03 1.86 1.86 1.86 1.86 1.86
Return on Assets 11.2% 9.1% 6.7% 5.4% 6.0% 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
Return on Equity 19.7% 17.4% 12.2% 9.4% 11.1% 11.1% 10.2% 10.2% 10.2% 10.2% 10.2%
Return on Capital 14.6% 12.1% 8.9% 7.8% 8.9% 9.3% 9.5% 9.5% 9.5% 9.5% 9.5%
1.50
1.60
1.70
1.80
1.90
2.00
2.10
1.3 1.4 1.4 1.5 1.5 1.6 1.6 1.7 1.7 1.8
Total Asset Turnover Equity Multiplier
5
5
6
6
6
6
6
7
7
0
0
0
1
1
1
Days Sales Outstanding Inventory Turnover
0%
5%
10%
15%
20%
25%
30%
35%
40%
Gross Profit Margin Operating Profit Margin
0%
2%
4%
6%
8%
10%
Net Profit Margin Free Cash Flow Margin
0% 5%
10% 15% 20% 25% 30% 35% 40% 45%
Total Debt to Equity Total Debt to Assets
0%
5%
10%
15%
20%
25%
Return on Equity Return on Assets
0%
5%
10%
15%
20%
25%
Return on Equity Return on Capital
LOW Performance Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 2 of 5 Analysts: Elisa Gayle, Brenna Koch, Jonathan Ramirez
Capital, NOPAT & FCF 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
NOWC 2,909 3,041 3,911 3,381 3,304 3,700 3,657 3,723 3,782 3,839 3,897
Net Fixed Assets 18,971 21,361 22,722 22,499 22,089 21,970 23,354 23,774 24,154 24,517 24,884
Total Invested Capital 21,880 24,402 26,633 25,880 25,393 25,670 27,011 27,497 27,937 28,356 28,781
Effective Tax Rate 37.9% 37.7% 37.4% 37.4% 37.7% 36.7%
NOPAT 3,204 2,947 2,383 2,020 2,267 2,381 2,559 2,605 2,647 2,687 2,727
Free Cash Flow N/A 425 152 2,773 2,754 2,104 1,218 2,119 2,207 2,267 2,301
NOPAT Per Share 2.09 1.99 1.64 1.38 1.62 1.87 2.19 2.37 2.51 2.60 2.64
FCF/Share N/A 0.29 0.10 1.90 1.97 1.66 1.04 1.93 2.09 2.19 2.23
Return on Capital 14.6% 12.1% 8.9% 7.8% 8.9% 9.3% 9.5% 9.5% 9.5% 9.5% 9.5%
Intrinsic Value of FCFs Valuation Model
Value Creation 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Economic Value-Added 1,390 925 176 -126 162 254 320 326 331 336 341
Market Valued-Added 32,796 20,231 11,551 18,402 19,463 22,982 7,952 8,073 8,195 8,318 8,442
PV of Future FCFs 26,921 28,727 30,956 30,749 30,544 30,971 32,320 32,880 33,399 33,900 34,408
Value of Non-Oper. Assets 364 281 245 632 652 1,014 592 603 613 622 631
Total Intrinsic Firm Value 27,285 29,008 31,201 31,381 31,196 31,985 32,913 33,483 34,012 34,522 35,040
Intrinsic Value of Equity 22,937 22,368 25,175 26,853 24,659 25,316 26,510 26,966 27,389 27,800 28,217
Per Share Intrinsic Value $14.94 $15.10 $17.28 $18.37 $17.60 $19.92 $22.67 $24.53 $25.96 $26.88 $27.30
Year-End Stock Price $31.61 $24.53 $20.32 $25.63 $26.82 $31.09
Over (Under) Valuation/Sh $16.67 $9.43 $3.04 $7.26 $9.22 $11.17
% Over (Under) Valued 52.7% 38.4% 15.0% 28.3% 34.4% 35.9%
Cost of Capital 2012 Weight % Cost Wgt Cost
Equity Capitalization 37,274 84.8% 9.3% 7.9%
Total Debt 6,669 15.2% 4.5% 0.4%
Preferred Stock 0 0.0% 0.0% 0.0%
Value of All Securities 43,943 100.0%
Effective Tax Rate 36.7% Long-Term Growth Rate:
Risk-Free Rate 2.27% 1.5%
5-Yr Beta 1.00 Alternative Beta:
Market Risk Premium 7.0%
CAPM Cost of Equity 9.3%
8.3%
(Tax rate from last historical year used in forecasts)
Weighted Average Cost of Capital:
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
-$400 -$200
$0 $200 $400 $600 $800
$1,000 $1,200 $1,400 $1,600
Economic Value-Added Market Valued-Added
$0
$5
$10
$15
$20
$25
$30
$35
Year-End Stock Price Per Share Intrinsic Value
0%
10%
20%
30%
40%
50%
60%
$0 $2 $4 $6 $8
$10 $12 $14 $16 $18
2007 2008 2009 2010 2011 2012
Over (Under) Valuation/Sh % Over (Under) Valued
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
Total Invested Capital Net Fixed Assets
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
NOPAT Free Cash Flow
LOW Performance Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 3 of 5 Analysts: Elisa Gayle, Brenna Koch, Jonathan Ramirez
Relative Valuation 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Stock Price/Intr. Value $31.61 $24.53 $20.32 $25.63 $26.82 $31.09 $22.67 $24.53 $25.96 $26.88 $27.30
Price to Earnings 15.6 12.9 13.5 21.0 18.7 21.5 14.0 14.0 14.0 14.0 14.0
Price to Free Cash Flow N/A 85.4 194.2 13.5 13.6 18.8 21.8 12.7 12.4 12.3 12.3
Price to Sales 1.0 0.8 0.6 0.8 0.8 0.8 0.5 0.5 0.5 0.5 0.5
Price to Book 1.7 1.2 0.9 1.1 1.1 1.2 0.8 0.8 0.8 0.8 0.8
Earnings Yield 6.4% 7.7% 7.4% 4.8% 5.3% 4.7% 7.1% 7.2% 7.2% 7.2% 7.2%
Dividend Yield 0.6% 1.2% 1.6% 1.4% 1.6% 1.7% 2.8% 3.0% 3.1% 3.1% 3.2%
Free Cash Flow Yield N/A 1.2% 0.5% 7.4% 7.3% 5.3% 4.6% 7.9% 8.1% 8.2% 8.2%
Relative Valuation Pricing Model Adjust 2013 Intrinsic Dividend Discount Valuation Model
2013E Ratio Ratio Ratio Metric Value LOW Lowe's Companies Inc.
Price to Earnings 14.0 $1.62 $22.67 20.0% 15.0% 10.0% 5.0% 3.0%
Price to Free Cash Flow 21.8 $1.04 $22.67 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Price to Sales 0.5 $43.80 $22.67 $0.18 $0.29 $0.34 $0.36 $0.42 $0.53 $0.64 $0.73 $0.80 $0.84 $0.87
Price to Book 0.8 $29.55 $22.67
1-Yr Div Growth 26.2% PV Dividends 1-4 $2.40 Dividend Yeld 1.7%
2013E 3-Yr Div Growth 16.5% PV Perpetual Div. $9.75
Current Price $31.09 5-Yr Div Growth 24.1% Intrinsic Value $12.15 If Purchased For: $31.09
PV of Free Cash Flows $22.67 Risk-Free Rate 2.27% Current Price $31.09 Expected Return = -14.8%
Dividend Discount Model $12.15 5-Yr Beta 1.00 ($31.09) $0.64 $0.73 $0.80 $14.74 $13.89
Price to Earnings $22.67 Market Premium 7.0% Analyst Notes:
Price to Free Cash Flow $22.67 Required Return 9.3% Based on a current dividend of $0.53, expected growth as shown above and an equity required
Price to Sales $22.67 Alternative Beta return of 9.3%, LOW is worth $12.15 per share, vs. a current price of $31.09.
Price to Book $22.67
Compared With: Compared With:
The Home Depot, Inc. S&P 500 Index
Wal-Mart Stores Inc.
Expected Dividend Growth Rates
Intrinsic Value Estimates vs. Current Price
May 7, 2012
Annual Dividend
0
50
100
150
200
250
Price to Earnings Price to Free Cash Flow
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Price to Sales Price to Book
0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
Earnings Yield Dividend Yield
$0
$5
$10
$15
$20
$25
$30
$35
Current Price
PV of Free Cash Flows
Dividend Discount
Model
Price to Earnings
Price to Free Cash Flow
Price to Sales
Price to Book
Intrinsic Value Estimates vs. Current Price
-40% -30% -20% -10%
0% 10% 20% 30% 40% 50%
LOW HD WMT
-30%
-20%
-10%
0%
10%
20%
30% LOW ^SPX
LOW Performance Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 4 of 5 Analysts: Elisa Gayle, Brenna Koch, Jonathan Ramirez
Piotroski Financial Fitness Scorecard (10-point scale) 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
Positive Net Income 1 1 1 1 1 1 1 1 1 1
Positive Free Cash Flow 1 1 1 1 1 1 1 1 1 1
Growing ROA (% change NI > % change TA) 0 0 0 1 0 1 0 0 0 0
Earnings Quality (Operating Income > Net Income) 1 1 1 1 1 1 1 1 1 1
Total Assets Growing Faster Than Total Liabilities 0 1 1 0 0 1 1 0 1 0
Increasing Liquidity (Current Ratio) 0 1 1 1 0 0 0 0 0 0
% Change Shares Outstanding (Diluted) < +2.0% 1 1 1 1 1 1 1 1 1 1
Expanding Gross Margin 1 0 1 1 0 1 0 0 0 0
Asset Turnover (% change sales > % change assets) 0 0 0 1 1 0 0 0 0 0
Total Liabilities to Operating Cash Flow (EBIT) < 4.0 1 1 1 1 1 1 1 1 1 1
Piotroski Score 6 7 8 9 6 8 6 5 6 5
Altman Probability of Bankruptcy Z-Score Weight 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E
(Current Assets-Current Liabilities)/Total Assets 1.200 0.0363 0.0600 0.0864 0.1014 0.0780 0.0730 0.0730 0.0730 0.0730 0.0730
Retained Earnings/Total Assets 1.400 0.6739 0.6585 0.7232 0.7606 0.7247 0.6423 0.6767 0.7102 0.7425 0.7740
Earnings Before Interest & Tax/Total Assets 3.300 0.5060 0.3851 0.3226 0.3565 0.3700 0.3862 0.3862 0.3862 0.3862 0.3862
Market Value Equity/Total Liabilities 0.600 1.4757 1.2192 1.6133 1.4464 1.3925 0.9945 0.9937 0.9934 0.9934 0.9934
Sales/Total Assets 0.999 1.5626 1.4768 1.4293 1.4471 1.4946 1.4807 1.4807 1.4807 1.4807 1.4807
Altman Score 4.25 3.80 4.17 4.11 4.06 3.58 3.61 3.64 3.68 3.71
The interpretation for the Altman Score is: Safe Zone = Z > 2.9, Grey Zone = 1.23 < Z < 2.9, Distress Zone = Z < 1.23
0
2
4
6
8
10
Piotroski Financial Fitness Scorecard (10-pt scale)
3
3
4
4
4
4
4
Altman Probability of Bankruptcy Z-Score
LOW Performance Analysis. Datasource: CapitalIQ Financial Analysis & Valuation, Page 5 of 5 Analysts: Elisa Gayle, Brenna Koch, Jonathan Ramirez