Lowe s Companies, Inc. NYSE: LOW

1. Lowe’s Companies, Inc. (NYSE: LOW) Lukas Roots, Pramod Thammaiah, Tae Yoon Portfolio & Risk Management

2. Firm Overview Porter’s Five Forces SWOT Analysis Competitor Analysis Standard Valuation Metrics Balance Sheet Additional Information Conclusion Table of Contents

3. Founded in 1946 and based in Mooresville, N.C., Lowe's is the second-largest home improvement retailer in the world. Offers a line of products for home decorating, maintenance, repair, remodeling and property maintenance. Also offers repair and remodeling contractors, electricians, landscapers, painters, plumbers, and commercial and residential property maintenance professionals, among others. Lowe's operates more than 1,525 stores in the United States and Canada. With fiscal year 2007 sales of $48.3 billion, Lowe's Companies, Inc. is a FORTUNE® 50 company that serves approximately 14 million customers a week. Firm Overview of Lowe’s

4. Porter’s Five Supplier Power Industry dominated by large companies: Lowe’s, Home Depot, and Sherwin-Williams. Strong brand name, which breeds loyalty. Low profit margin – highly dependant on volume. Little differentiation of inputs Supplier power high, although Lowe’s suffers from a low profit margin and a resultant dependence on volume. Supplier Power hurt by little differentiation of outputs (can only brand company, not products).

5. Porter’s Five (Cont’d) Barriers to Entry Company brand names generate consumer loyalty, and are expensive and difficult to develop. Cost of operations extraordinarily high, with annual expenditures above the market capitalization of the companies. Threat of Substitutes Lowe’s avoids the threat of substitutes by appealing to both do-it-yourself (DIY) and do-it-for-me (DIFM) customers

6. Porter’s Five (Cont’d) Buyer Power Millions of small scale customers, who have almost no buyer power. Prices do not fluctuate substantially as demand waxes or wanes Nevertheless, small price fluctuations can drastically affect Lowe’s miniscule profit margins. Degree of Rivalry Although the industry is dominated by a few large companies, competition is still tough. In particular, competition with Home Depot significantly affects profit margins.

7. Good reputation and brand name. Ranked 45 on the FORTUNE®  500 in 2006 Large pool of customers at about 4 million customers a week. Relatively specific products targeted to house-building supplies; established itself as a go-to place for house supplies. Also provides “installation services in over 40 categories with flooring, millwork and cabinets and countertops generating the highest sales.” -Reuters Annual Report suggests that yearly earnings have increased steadily for the past several years. SWOT AnalysisStrengths

8. Since HFAC bought its stocks in 4/23/2004, Active return is roughly -34%. With economy down and housing prices falling, food prices rising, and gas prices souring, home-improvement retailers have not been active on the retailer market recently. Home owners are reluctant to pay for renovations, which takes up a chunk of Lowe’s income (~6%). Revenue has been sliding for most of the year as the housing slump continues. Does not seem inclined to make a move for the international market, as its competitor Home Depot is doing. SWOT AnalysisWeaknesses

9. Continues to expand: During the fiscal year ended February 1, 2008, (fiscal 2007) the Company opened 153 (149 new and four relocated) that included two primary prototypes: an 117,000-square-foot store for markets and a 94,000-square-foot store to serve smaller markets. The Company offers installation services in over 40 categories with flooring, millwork and cabinets and countertops generating the highest sales. Installed Sales accounted for approximately 6% of Lowe's Companies, Inc.'s total sales in fiscal 2006. This is a great advantage over competitors, especially Home Depot, which only arranges contact with third parties to do the service. SWOT AnalysisOpportunities

10. The Home Depot is an ever-present threat, being number one in home supply retailing. As mentioned, the house market is not doing so well, so it’ll be difficult to attract more customers at least in the near future. SWOT AnalysisThreats

11. Offers almost identical products. P/E:  11.84 (LOW P/E:  12.56) Beta:  1.04 (LOW Beta:  0.89) EPS:  2.34 (LOW EPS:  1.86 Mkt Cap:  46.76B  (LOW Mkt Cap:  34.10B) Only arranges services for repairs with other smaller companies, unlike Lowe’s that has its own pool of workers for more profit. During the fiscal year ended January 28, 2007 (fiscal 2006), Home Depot acquired The Home Way, a Chinese home improvement retailer, including 12 stores in six cities. During fiscal 2006, the Company under its HD Supply segment acquired Burrus Contractors Supply, Heartland Waterworks Supply, Cox Lumber Company, Hughes Supply, CTF Supply, Rice Planter Carpets, Edson Electric Supply, Sioux Pipe, Forest Products Supply, Texas Contractors Supply, Grafton Utility Supply and Western Fasteners. In addition, during fiscal 2006, the Company acquired Home Decorators Collection and Jubilee Home Solutions under its Retail segment. Competitor AnalysisThe Home Depot (NYSE: HD)

12. PE: 13.02 Beta: .81 Price to Sales: 0.74 Price to Book: 2.20 Market Cap: 35.46B Standard Valuation Metrics

13. Total Current Assets steady past few years at $8.7 billion in 2008 Cash declining each year, but Inventory growing Total Assets = $30 billion Growing steadily at approx. $3 billion/yr Approx. $28 billion in plant and property equipment (and $7.5 billion depreciation)? Total Liabilities = $14 billion Growing steadily at approx. $2 billion/yr Balance Sheet

14. Total Revenue (in 2008): $48 billion Increasing every year, but more slowly each year Operating Income: $4.5 billion Steady over past last 3 years Over $1 billion of Depreciation each year Income Statement

15. Estimated Share Price: $26.35 Revenue Growth: -2% for 2 years 0% for the 3rd year +2% for 2 years Terminal growth rate: 3% Total Expenses: 91% Tax Rate: 39% Discount rate: 10% DCF

16. DCF (cont’d)

17. DCF Analysis of Lowe’s suggests a fair price of $25.29 Current Price of Lowe’s is $23.33 Lowe’s low beta and debt result in a low discount rate. However, I believe that Lowe’s historical beta understates future risks. If Lowe’s discount rate were 2% higher, for example, DCF would suggest a fair price of $16.08. Lowe’s may have a decent P/E, but growth prospects are mediocre. If risks are understated by the beta, Lowe’s may be a very bad investment. Conclusion 1: SELL

18. Conclusion 2: HOLD Both conservative DCF's give valuations ($25.29 and $26.35) and its trading at $23.33 So the market has already priced in the expected downturn in the home improvement market It has a solid balance sheet, with Total Assets > Total Liabilities