Lowe's Companies (LOW)

Total return at 5 years: 10.0%/year = 7.3% appreciation + 2.7% dividend. The target price ($264) is ex-dividend; the $29 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $408 · Multiples $237) exceeds the market price ($186).

Today — fairly valued: at $186 trades ~21.6% below its value discounted to today (~$237); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($264) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$150.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($186) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-12.6%/year) than we project (4.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$4.4 bn of owner earnings in year 5 (vs ~$10.4 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on Resultado operativo (EV/EBIT — nivel de empresa, pre-interés). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 is the TTM ended Jul 31, 2026 (revenue $90.4bn). Year 1 is anchored on the guidance in the Aug 19, 2026 release, which the company cut in that same presentation (§5 R1 previa): fiscal 2026 sales of $92,000M against the earlier $92,000-94,000M, flat comparable sales against flat to up 2%, an operating margin of 11.2% against 11.2%-11.4%, and diluted earnings per share of approximately $11.75 against $11.75-12.25. Built from levels, that guidance implies a second half of fiscal 2026 of $42,966M, 3.8% above the same half a year earlier; with the first half of fiscal 2027 growing around 1% — flat comparable sales plus new stores, no longer with any inorganic contribution — the rolling window running from August 2026 to July 2027 comes out at 2.5%. ⚠️ That number points in the opposite direction from what year 0 suggests: the TTM grew 8.2% and the previous model started at 5.2%, so a mechanical re-base would have raised the path. What grew is not the business but the lapping of the Foundation Building Materials and Artisan Design Group acquisitions: comparable sales for the quarter rose 0.2% and the company itself attributes the rest to those deals and to persistent pressure on the end consumer in the do-it-yourself segment. Extrapolating the 8.2% would have capitalized an anniversary as if it were growth. The path takes the shape of a valley and a recovery — 2.5% in year 1 and then 3.2%, 3.5%, 3.4% and 3.3% — invoking the rebound exception of §5 R3 (floor of 5% or less): year 1 is the trough of the lapping and of consumer weakness, and the 3.3% terminal is left unchanged because it is anchored to the store network and the addressable market (§5 R2), not to year 1. The guided operating margin (11.2%, no longer a range) implies a slight compression against the TTM (11.4%) from the margin dilution of the newly incorporated wholesale distribution business and from the amortization of intangibles from the acquisitions (~40 basis points declared by the company itself); from year 2 the margin recovers gradually on operating leverage and integration synergies, without reaching the FY24 peak (13.4%). Share buybacks have been practically paused since $10.1bn was deployed on the acquisitions (FY25: $116M repurchased versus $4.1bn in FY24), so the model holds shares constant at 560M and does not accumulate cash. The tax rate used is the real effective rate of the TTM (23.9%), with no typical approximations.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $264 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $186, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $264 in 5 years plus $29 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $237. Against the current market price ($186), the margin of safety is 21.6% (trades below the maximum → there is margin) and the total return at that price would be 10.0% annually.

• Entry multiple. Trades at 13× operating income over the last twelve months.
• Margin of safety. It trades close to intrinsic value, far from the required margin of safety.
• Expected return. The base case implies +10% annual return over 5 years plus the dividend.
• Consistency with guidance. The base case follows the company's reaffirmed guidance rather than extrapolating the historical trajectory.
• Multiple sensitivity. The exit multiple (14.2×) sits in the mid-to-upper zone of the specialty retail band (12×-17×) given the quality of the return on capital.
• Dividend yield. The current dividend contributes an additional return component beyond price appreciation, with sustained low-mid-single-digit growth.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (125%, cash vs. accruals)
• ✕ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Return on capital. Return on invested capital is around 29%, well above the 10% bar.
• Cash generation. TTM operating cash flow (US$9.8 billion) comfortably covers capex and the dividend.
• Cash conversion. Net income translates into operating cash consistently, without signs of unusual accruals.
• Earnings quality. FY2025 earnings include US$321 million of pre-tax expenses from the FBM and ADG integration, a one-off that depresses GAAP results without affecting the value of the business.
• Stock-based compensation. Stock-based compensation (TTM ~US$254 million) is low relative to income and cash flow, with no material SBC trap to correct.
• Working capital. The business releases working capital at the margin (TTM), typical of a mature retailer with good inventory management.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Lowe's growth breaks down into price (average ticket) times volume (customer transactions), the same driver logic a marketplace applies to GMV times take rate. Unlike an e-commerce business, here volume has been declining for two years and price is doing all the work; reported total growth also includes the non-comparable effect of the FBM and ADG acquisitions, which is not an organic driver and is expected to dilute as those units enter the comparable base.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (31-jul-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Organic growth. Comparable sales are practically flat (+0.2% in FY2025), sustained only by price.
• Inorganic growth. The FBM and ADG acquisitions (more than US$10 billion) contribute most of recent total growth.
• Reinvestment runway. Guided capex (up to US$2.5 billion) remains modest relative to operating cash flow, without a need for aggressive reinvestment.
• Company guidance. The guidance reaffirmed on May 20, 2026 shows no reacceleration: revenue +7-9% (driven by the acquisitions) and operating margin stable to slightly lower.
• Market penetration. The home improvement market is highly fragmented; there is room to gain share of the large Pro customer via FBM/ADG.
• Cycle sensitivity. Growth depends on the housing cycle and on real disposable income, both under pressure.

• Demand recurrence. Home improvement is a recurring need, but discretionary spending gets postponed in weak cycles, as shown by the two-year transaction decline.
• Product differentiation. Combines recognized national brands with higher-margin private brands, without being a pure commodity but also not a unique product.
• Pricing power. Average ticket rose 3.0% in FY2025 despite falling volume, evidence of the ability to sustain price.
• Operating leverage. Operating margin compressed 74 basis points in FY2025 from deleveraging of overhead expenses, showing that operating leverage runs both ways.
• Recession behavior. The home improvement sector is sensitive to the housing cycle; the transaction decline of the last two years reflects pressure on affordability and disposable income.
• Competitive position. World's second-largest home improvement chain, with scale comparable to the sector leader in most categories.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0 bn
• !Interest coverage (EBIT / interest)7.0x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 125% of ROIC
• ✓Value creation (ROIC − 10% bar)+19pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.9x — no over-investment
• ✓Float / working capitalFrees up cash $0.6 bn (float / negative WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.3% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Long-term debt of ~US$36.8 billion against negative book equity, a result of years of aggressive buybacks rather than operating weakness.
• Interest coverage. TTM EBIT (US$10.2 billion) covers guided net interest (~US$1.6 billion) with wide margin.
• Liquidity. Limited cash and short-term investments (~US$3.4 billion), consistent with a model that prioritizes capital return over cash accumulation.
• Operating cash generation. TTM operating cash flow (US$9.8 billion) funds capex, the dividend, and debt service without visible strain.
• Balance sheet impact of the acquisitions. Financing FBM and ADG raised leverage and consumed buyback capacity for at least one fiscal year.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Capital allocation. Paused the buyback to fund strategic acquisitions, prioritizing scale in the Pro customer over immediate shareholder return.
• Alignment. The CEO holds a meaningful stake (806,743 shares) but the executive group as a whole owns less than 1% of the capital.
• Execution track record. The CEO arrives with a career built within the sector, including at the main competitor, which reduces learning-curve risk.
• Regulatory compliance. Paid a US$12.5 million fine for violations of an environmental consent decree on installations and signed a second decree subject to court approval.

• Motivated sellers: the buyback pause and FBM/ADG integration costs (US$321 million pre-tax, -US$0.43 of earnings per share in FY2025) depress GAAP results without affecting the value of the business
• Falling transaction volume generates headline noise that obscures the fact that average ticket and guidance continue to support revenue
• Partial missing buyers: market attention is on the larger rival, and integrating recent acquisitions tends to draw more cautious coverage until results are proven

There is no clear and evident reversal catalyst beyond execution of the integration itself: the market price already reflects the company's reaffirmed guidance fairly well, so the margin of safety is not wide.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +2%/year (+12% total): the margin of safety protects the downside. The bull (+16%/year, +113% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Housing cycle and discretionary spending. Sales depend on home-price appreciation, home turnover, and real disposable income, all under pressure in 2025.
• Tariffs and supply chain. A significant portion of merchandise is sourced from China and Mexico; changes in trade policy could raise merchandise costs and pressure margin.
• Cybersecurity. The company and its third-party vendors have already faced third-party incidents; a material breach would generate remediation costs and damage trust.
• Execution of the acquisitions. There is uncertainty over whether the expected benefits of FBM and ADG are achieved, with risk of future impairments as has already happened in the company's past.
• Installation program legal risk. Lowe's acts as general contractor for installation with third parties and already paid a US$12.5 million civil penalty for an environmental consent decree, with a second decree pending court approval.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 29% above the 10% bar, but the margin is limited (+22%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 4% at a multiple/growth of 3.4 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 10% (EBIT/EV) + ROIC 29% → makes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -13% vs our 4%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -1%/yr, bull-scenario ceiling +14%/yr over 5y → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: cost advantage, efficient scale, intangibles, switching costs → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -13%, within what we project (4%) — the story squares with the numbers.