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We strongly believe that the market is undervaluing Lowe's future earnings potential. We also strongly believe that Lowe's can increase their EBITDA margins* (see note below if you'd like us to explain this metric again) to 12%+ next year.
If they are able to do this, then they should be able to see significant upside relative to their current pricing. We therefore are overweight the stock and this is one of our strongest picks in the construction sector (in addition to Home Depot). Our price target is $195 which represents over 30% upside from it's current price!
Using the above, we've factored this into our DCF** (see note below) model and assigned a price target of $195. We strongly believe the market is discounting the possibility of this happening, given the miss of LOW's last earnings report. We are therefore buying the name before the market see's this opportunity and drives the price up!
** DCF - Discounted cash flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows. DCF analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future. This is because a dollar today is worth more than a dollar tomorrow, given the returns you can generate on it and the inflation in the market. That is why if we believe a stock may take a year or more to generate additional revenue or growth, we need to discount that to current prices to understand if there is a difference in the stock price!
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