Weak Housing Backdrop Doesn’t Change Our Long-Term Thesis on Lowe’s; Shares a Bargain

Although wide-moat Lowe’s fourth-quarter results came in line with our expectations (sales of $22.4 billion and adjusted diluted EPS of $2.28 versus our $22.4 billion and $2.20, respectively), shares slid roughly 6% on the print. We contend the pessimistic market sentiment stems from a fiscal 2023 sales outlook that is normalizing (net sales of $88 billion-$90 billion, below our $91 billion preprint forecast, which includes the loss of the divested Canadian business) and the near-term macro uncertainties, despite secular industry tailwinds that remain solid. Impressively, Lowe’s 2023 operating margin goal of 13.6%-13.8% is largely unchanged, despite lower sales, set to benefit from perpetual productivity initiatives. We plan to lift our $212 fair value estimate by a low-single-digit rate to account for time value and view shares as undervalued.