Lowe’s (LOW) is the world’s second-largest home improvement retailer, with sales of $96 billion in FY22; the company operated 1,971 stores in the U.S. and Canada at the end of FY22, notes Christopher Graja, an analyst with Argus Research.

We believe that CEO Marvin Ellison will continue to succeed with his turnaround initiatives. The strong performance in 1H21 was potentially a turning point, and the FY22 performance was a strong confirmation, but he still has a lot of work to do.

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

Lowe’s weathered the first phase of the COVID-19 crisis better than most retailers, as home repairs and building activity was treated as essential in most of the U.S. The company's strong performance continued into the second half of FY21 and FY22. We believe that the shares stand out for diversified investors who are looking for exposure to discretionary retail at financially strong companies.

Our bullish multiyear thesis has been 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 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 has said that the company’s research findings show that the importance of the home will be elevated for many years to come.

On May 27, Lowe’s announced a 31% dividend increase in the quarterly dividend to $1.05 per share. The new dividend — which yields approximatley 2.1% — is payable on August 3. Lowe’s has paid a dividend in every quarter since going public in 1961 and the company has increased the dividend for more than 25 consecutive years.

We believe that LOW is attractive based on the company’s financial strength and our expectations for market share gains and higher margins and earnings. The shares are down almost 25% thus far in 2022. They are currently trading at 14.7-times our FY23 EPS estimate and 13.8-times our FY24 estimate.

We have confidence in CEO Ellison’s turnaround plan and expect strong demand for home improvement products. Our valuation for Lowe’s reflects our five-year growth rate of 14%, declining to 3% as the business and turnaround mature. We are maintaining our target price of $290.

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