Lowe's Companies Inc LOW

We plan to raise our $140 fair value estimate for wide-moat Lowe’s by around $5, updating our longer-term outlook after digesting the firm’s forecast following its investor meeting. We are set to make a few changes across our forecast that lead to this increase. First, we plan to adjust our 2021 outlook for improved profitability. Lowe’s currently expects a 2021 operating margin of 12%, while our model projects about 10.5%. This single-year productivity lift raises our intrinsic value by $5. Then, we expect to reduce our terminal selling, general, and administrative cost ratio by more than 100 basis points, to around 18%, as Lowe’s captures additional benefits from operating efficiencies, leading to another $5 in fair value upside. However, these gains are offset by two factors. One, the gross margin will improve less than we originally thought, with a terminal gross margin just above 33%, rather than the 34% we had modeled (as supply chain investments offset pricing gains). Second, capital expenditures should exceed the $1.7 billion average we forecast between 2021-24 (now likely to be closer to $2 billion annually). Impressively, Lowe’s could now reach nearly 13% operating margin in 2025, above the 11.5% we had been expecting.