EPS. Number of Stores

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Daniel Kim Daniel Ortega Brian Pabian Ticker: Low Lowe s Company Snapshot Stock Price $20.93 52 Wk. Range 18.07-27.45 Market Cap $26.38B P/E Ratio 14.36 EPS 1.46 ROE (2010) 10.81 Debt Ratio.86 Debt-Equity.46 Shares Out 1.26B 3 2 1 0 2000 1500 1000 500 EPS Number of Stores Recommendation: Buy 2400 Common Shares at NAV of $50,232 Portfolio Diversification $5 billion share buy back Good debt management Solid niche market Cost cutting strategies Close down unprofitable stores Currently at growth stage Dividend YLD 2.8% 0 Beta 1.0 1

Table of Contents Qualitative Analysis Investment Thesis... 3 Company Business Model... 4 SWOT Analysis... 5 Recent News:... 7 Macroeconomic Analysis... 8 Industry Analysis...10 Porter s Five Forces...11 Competitors...12 Quantitative Analysis Economic Value Added...14 Financial Ratio Analysis...16 Pro Forma Income Statements...22 P/E Valuation...25 P/S Valuation...26 P/B Valuation...27 EV/EBITDA Valuation...29 Target Price...30 Conclusion...30 Appendix...31 2

Investment Thesis 1 Comparative Advantages Well known company brand name driven by extensive marketing campaigns. Appeal to both men and women, and recently trying to cater to Latin American population with new signage and translation services. Carry both national and private brands to accommodate customer needs. Starting 2010, Lowe s has been closing unprofitable stores across the U.S. to focus in higher growth areas. Division of operations management will allow for better cost control Bar code scanning for product information will allow customers to learn more about a product before buying it. Diversified supply chain, which allows continuous inflow of products. Not one company supplies more than 8% of products. Why Now? Board of Directors intends to buy back $5 billion worth of common stock in the next 3 years. Good debt management will allow the company to grow with small risks relative to competitors which will further keep interest expense from debt at low levels. With the economy turning around, households will look at improving or fixing their home. This will help Lowe s profitability increase over the coming years. Home Depot, Lowe s largest competitor, is looking at this point to keep sales stable across stores. On the other hand, Lowe s is undertaking the process of closing unprofitable stores and opening new ones in areas of high demand such as the Northeast. Expansion to Canada and Mexico could open new home improvement markets Risks Sales heavily rely upon economic conditions. Changes in laws and regulations such as product safety, health care and energy costs. Home Depot is the leader in home improvement industry and takes up a large portion of market share. Rapid increase in operations expense could lag bottom line earnings potential. Quick adaptation to technology innovation is necessary to compete. Closing and opening several stores could hinder progress and earnings 1 Edgar s online 10K--Business 3

Company Business Model Lowe s Overview 2 3 Lowe s Companies was originally founded as a small hardware store in 1946, it was then incorporated in 1952 in the state of North Carolina with one vision: To be customers first choice for home improvement. The company was publicly held in 1961, and since has expanded to 1,749 stores as of January of 2011. With 161,000 full time and 73,000 part-time employees, Lowe s Companies Inc. is the second largest home improvement retailer and a Fortune 50 company. Lowe s opened 42 new stores in 2010 and currently operates across all 50 U.S. states and has stores in Canada and Mexico. Additionally, Lowe s expects to open 25 new stores in 2011 mostly in Canada. In 2009, Lowe s entered into a joint venture with Woolworths Limited, an Australian retailer, to develop home improvement stores in Australia. The first stores are expected to open in the late second half of 2011. Based on 2009 data, Lowe s predicted the U.S. home improvement market will be $570 billion annually which includes roughly 75% product demand and 25% installed labor. Lowe s considers social and environmental responsibility as essential for building a healthier business. They have contributed $30 million to schools and community organizations; they have also been awarded the Best Employers for Healthy Lifestyles Award. In early 2011, Lowe s won the ENERGY STAR Sustained Excellence Award for successfully promoting energy and water conservation alternatives to customers. Providing home improvement value and solutions has been Lowe s longstanding mission for the past 60 years. This fact makes it a likely investment candidate based on Peter Lynch s criteria. Products 4 5 6 Lowe s offers customers a vast array of home improvement products to satisfy the needs of homeowners, renters and commercial business consumers. Lowe s sales for the 2010 fiscal year were $48 million; the following are examples of products and their influence on total sales: Lawn, landscape, nursery and outdoor equipment: (14%) Lumber and Building materials such as concrete and drywall. (13%) Appliances: Refrigerators, stoves, washers, dryers etc. (11%) Plumbing: Fashion and rough. (11%) Tools and hardware. (10%) Seasonal living and home fashion. (8%) Lighting and rough electrical. (8%) Cabinets, countertops, home organization and others. (7%) Paint, equipment and accessories. (6%) Millwork: Doors, frames and crown molding (6%) 2 Edgar Online- 10K- Item 1 3 Lowes.com/company+overview 4 Lowes.com/products 5 Edgar Online- 10K- Business 6 Hoovers.com 4

Flooring: Wood, vinyl, tile, rug and laminate. (6%) Note: Products are compiled into general categories Each Lowe s store carries a wide variety of National brands to accommodate customers that prefer and or trust a particular brand. Whirlpool appliances, Dewalt power tools and Valspar Paints are just a few examples of National brands carried by Lowe s. Stores carry private brands as well to facilitate the shopping experience, with quality products in areas that no single National brand outstands. Kobalt tools, Portfolio lighting and Aquasource sinks & faucets are some examples of private brands. Lowe s provides its customers with project management tools that are available online. From virtual room designers and floor calculators to remodeling ideas and maintenance tips, Lowe s as virtually all resources needed to plan a project from start to finish without the need to leave the comfort of your home. After project planning, Lowe s offers its customers options to proceed with the project such as buying the actual product or have a Lowe s contractor finish the project for the customer. Services 7 Lowe s offers these services to facilitate the customers experience: Installation Service: Lowe s offers installation services through contractors. The majority of sales in this section come from flooring, millwork and cabinet & countertop projects. Installation services accounted for 6% of total sales in 2010 fiscal year Extended Protection and Repair Services: Protection plans are available to extend coverage beyond manufacturer s warranty mostly on tools, appliances and outdoor equipment. Repair services are available for all major appliances regardless of protection plan or manufacturer s warranty. Financing: Available through Lowe s Project Card to provide financing with major projects. SWOT Analysis 8 Strengths: Well known Company brand name- Lowe s has undertaken a strong marketing campaign and commands more television and radio time than their competitors. Broad Customer base- Brighter and easier to navigate stores enable for a more pleasant experience for both men and women. Due to initiatives to become more Latin American friendly, the company has included new highly legible signage and translation services within many of their stores. Complete line of Products from reliable brands- Lowe s offers items for maintenance, repair, remodeling, home decorating, and home improvement. Each store carries a wide variety of national brands that instill confidence in customers, such as Whirlpool for appliances and Valspar for paint. Private brands help differentiate Lowe s from their competition- This brands help create a value alternative to national brands as well as a simplified shopping experience when no national brands exist. Supply Chain- Lowes sources its products from over 7,000 merchandise vendors worldwide. No single vendor accounts for more than 8% of total purchases. The company looks for opportunities to purchase 7 Edgar Online-10k-Business 8 Edgar Online- Lowe s Form 10k-Business 5

directly from manufacturers to improve gross margin when possible. Lowe s owns and operates more than 14 regional distribution centers (RDCs); each store effectively can serve 120 stores. Convenient Credit Financing- Lowes offers a proprietary credit for retail customers as well as credit programs for Commercial Business Customers. Lowe s Business Account is ideal for small-to mediumsize businesses and offers minimum monthly payments while Lowe s Accounts Receivable, designed for medium-to large-size businesses that pay in full each month. On site specialists- For commercial business customers, the District Commercial Account Specialist will meet with Customers in their place of business and will ensure Lowes can meet customer needs for products and resources. The Project Specialist Exteriors program is available in over 1,300 stores and discusses projects such as roofing, riding, fencing and windows. Environmental Leadership- Lowes offers a variety of energy efficient and environmentally responsible products including appliances from Energy Star and paint with no volatile organic compounds. The U.S. Environmental Protection Agency has awarded Lowes two consecutive Sustained Excellence Awards in retail (2010-2011). Weaknesses: Sales are dependent on the growth and stability of the economy- The competitive environment in which Lowe s operated is particularly challenging during periods of slow economic growth and high unemployment. Limited control of product quality- Lowe s has limited control over its value chain before the product has been purchased from the manufacturer. This poses the risk of recall effects if product quality is consistently not on par. Costumer Service Issues- Recent on-line complains associated with in store service may signal systematic weaknesses in training and or business processes Opportunities: Increased Housing Turnover rates, which is the percentage of the total units in a housing project or housing stock that change owners in a year, are expected to increase over 2010. Lowes.com- Provides consumers with a 24/7 shopping experience while providing online product information, customer ratings and reviews, online buying guides and how-to videos and information. The website offers a variety of fulfillment options, including buy online and pick-up in-store as well as direct shipment. Lowes.com accounted for less than 1% of total sales in fiscal 2010. Further technological innovation- Technology may have a large impact on improving the inventory system at Lowes. The utilization of an electronic system that identifies inventories by RFID tags will benefit operations as well as the customer experience. Threats: Competitive pricing pressure- Lowes is constantly experience price competition from Home Depot and other companies throughout the home improvement industry. High Unemployment rates- The fact that Americans continue to struggle to find work stalls growth in the home improvement market. 6

Decline in Housing Prices- Some economists predict prices of houses to fall between 5% and 8% as foreclosure activity increases into 2012. Relatively low consumer spending- Predictions dictate a slower than average growth in disposable income of 2.6% for 2011. The average increase from the period between 1960-2010 has been 3.4%. Seasonal influences- Historically Lowes experiences its highest sales volumes in the months of April, May, and June while experiencing lower volumes in November, December, and January. Lowes must ensure that their working capital requirements continue to fund operational expenses in times of decreased sales. Recent News: September 19, 2011 9 10 11 Never Stop Improving is Lowe s brand new advertising tagline. According to Tom Lamb, Senior Vice President of Marketing, Never Stop Improving is Lowe s promise of constant innovation to satisfy their customer s needs. Lowe s is also launching an online tool MyLowes to aid customers with project managing from the comfort of their homes. Marketing research showed that this new advertising campaign makes customers feel motivated, inspired and energized about home improvement projects. Lowe s expects that their commitment to their customers will eventually show as higher sales in hopes of improving from the earlier Q1 and Q2 downturns. August 29, 2011 Lowe s announced restructuring of store operations and merchandise organization to improve efficiency and shopper s experience. U.S. store operations organization will be divided into 3 divisions: North, South and West. Lowe s executives believe that this new program will enhance not only in-store efficiency, but that it will further translate to better customer service. August 22, 2011 Lowe s Board of Directors announced a plan to repurchase $5 billion of the company s common stock. The repurchase has no expiration date and could be canceled at any time, but the Board is expecting to use the full amount within 2 to 3 years. In addition, Lowe s Board of Directors announce a cash $0.14 per share dividend payable November 2, 2011. August 15, 2011 Lowe s posted flat earnings for their most important quarter during the summer season. According to Chief Executive, Robert A. Niblock, three factors that have affected spending over 2011 are: the debt ceiling debate in Washington, the downgrade of the U.S. credit rating and volatility of the stock market. He added that households are concentrating in projects under $500 and putting off larger home renovations. In addition to the flat earnings performance in Q2, Lowe s closed seven stores that were underperforming. Revenue for the 9 Lowes/Media News Release 10 Investors.shareholders.com Lowe s Authorized $5 billion repurchase Program 11 New York Times: Lowe s Posted Flat Income in Quarter 7

quarter was $14.54 billion which underperformed analyst s expectations of $14.77 billion. Lowe s strongest performance took place in the Northeast and Central United States, while weaker performances were located by the gulf coast area. 12 13 14 15 Macroeconomic Analysis It is clear that, the recovery from the crisis has been much less robust than we had hoped slow economic growth has in turn led to slow rates of increase in jobs and household incomes Ben Bernanke s words fall short to describe the truth about the U.S. recovery. Real GDP increased at an annual rate of 1.3% during Q2, and according to Moody s Analytics, it is only expected to grow 2% over the second half of 2011 and 2.5% by the end of 2012. Real Gross Domestic Purchases rose by 1.0% on Q2 and.7% in Q1. In addition, Mark Zandi Chief Economist of Moody s Analytics, predicts that there is a 40% chance that the U.S. will see another recession in the coming 6 to 12 months. Currently 75,000 jobs are being created every month, but in order to stabilize the unemployment rate at 9%, 125,000 jobs must be created per month. This doesn t include discouraged and part-time workers (due to economic conditions) which would raise the unemployment rate to about 16%. According to Bernanke, the most persistent factor restraining the recovery is consumer behavior. Households have been very cautious in their spending decisions many continue to struggle with high debt burdens or reduced access to credit 12 Bea.gov 13 Moody s Analytics Chief Economist Report Mark Zandi 14 Reuters.com Bernanke s Highlights 15 Bls.gov 8

Unemployment rate, seasonally adjusted, September 2009 September 2011 Impact: With the poor performance in the job market and unemployment rates stagnant at 9%, one can safely assume that consumer behavior will continue to slow down the economic recovery. The ratio of household debt to personal disposable income heavily supports Bernanke s statement on household spending decisions. Overall, households have less disposable income today and more debt to pay off. Households will restrain themselves from buying any products aside from basic needs, therefore contractors and construction companies will be forced to reduce their spending and purchase of supplies due to a lack in demand. Lowe s will be directly affected on sales to both households and businesses, and a price war with Home Depot could potentially lead to a decline in net income. 9

Industry Analysis 16 17 18 Overall the home building and retail building supply industry is mature. The United States home center and hardware store industry includes 23,000 home centers and hardware stores with combined annual revenue of about $150 billion (Hoovers). Home centers are large supercenters that offer a complete selection of anything involved with home improvement while smaller industry players include independent hardware chains and mom and pop stores. Major home centers include Home Depot and Lowe s, while major hardware stores include Ace Hardware and other regional hardware chains. Among the home centers, the top four companies account for more than 90 percent of segment revenue while the top 50 hardware store companies account for 30 percent of segment revenue. Home Depot and Lowe s are the premier leaders that dominate the home improvement industry. Through continuous expansion, the big home center chains have forced many independent hardware retailers out of business. Large home centers offer a wide variety of products and brands, low costs on popular items, and thousands of choices. This broad differentiation forces small companies to compete in the weaknesses of home centers: unique and original products, customer service, and reaching smaller niche markets. Independent hardware stores survive by developing long-term customer relationships. Sales, for home improvement centers, are driven either by opening new locations or improving store volume. The best and profitable locations already exist, which mean new locations should not be built to close to not cannibalize each other s sales. US consumer spending on durable goods, an indicator of home center and hardware store sales, fell 0.2% in July 2011 compared to July 2010. The value of residential construction spending also fell 0.9% in the first seven months of 2011 compared to the first seven months of 2010. Contrary to other sales trend numbers, US retail sales for building materials and garden equipment and supplies dealers increased 5.6% in the first eight months of 2011 compared to the same period in 2010. Construction supplies companies have also been partnering with environmental cause entities such as Energy Star. Homes built with environmentally friendly purposes have grown as Energy Star has achieved an average national market presence in the new home sector of 25%. Home center companies have also offered Energy Star qualified appliances that cater to cost saving customers. The health of the housing market is a key factor in determining the growth prospects of the home improvement industry. Rising home prices, low interest rates and favorable employment allow investment on home improvement. The current housing market is not looking great. The rate of home ownership fell to 65.1% in April 2010, a 1.1% decrease from 2010. Number of vacant homes also grew by 43.8% to 15 million in 2010, up from 10.4 million in 2000. The number of US homes also increased from 16 million to 131.7 million units during a 10-year period from the year 2000 to 2010. Large metropolitan areas have moved towards renting homes with New York at 69% and Los Angeles at 61.5%. 16 Hoovers 17 ValueLine 18 CNN Money 10

Porter s Five Forces The threat of new entrants into the market: Low Lowe s and Home Depot, as the current industry leaders, have a comparative advantage against new entrants because of cost advantages through economies of scale. Lowe s and Home depot own an already large network and pre-existing brand awareness, which would give a new entrant a hard time replicating product differentiation and low prices with little buying power. Home improvement stores require a large capital investment for both the building as the large product base necessary to fill store shelves. The threat of substitute services or product: Low Home Depot could overtake Lowe s in the long run because their large size and wide reach in the industry. Outside Home Depot, there are only few real competitors and local hardware stores do not have the capital to overtake an 800-pound gorilla. Online retailing fails to pose a huge threat due to the technicality and precision that often comes with home improvement purchases. The bargaining power of suppliers: Low Suppliers have binding contracts with Lowe s so any clause would have to be premeditated. Lowes has also designed its purchases to ensure that no single vendor accounts for more than 8% of products found in stores. Suppliers also try to get their products on Lowes shelves due to higher purchase rates at home centers from high customer traffic compared to small local hardware stores. The bargaining power of customers: High The products sold at home centers tend to be expensive so customers are looking to save as much as they can. The threat of increased competition from rivals in the market: Medium Lowe s does face large competition facing an already largely established foe. Home Depot certainly has the size however it is at the mature stage. They are looking to increase and maintain sales in currently owned stores rather than expanding further in the United States. Lowe s, on the contrary, is in its growth stage, looking to take market share. 11

19 20 21 Competitors Home Depot (NYSE: HD) Home Depot is the prime competitor of LOW. As a somewhat duopoly together with Lowe s, the company sells building materials, home improvement products, equipment, garden products for do-it-yourself (DIY), do-it-forme (DIFM) and professional customers. Home Depot offers installation services for do-it-for-me customers, which range from carpeting, flooring, cabinets, countertops, and water heaters. The company also performs professional installation of various products such as generators, furnaces, and central air systems. As of May 1, 2011, it had 2,245 stores primarily in United States, Canada, Mexico, and China. Home Depot has the upper hand in sales when compared to Lowe s. Home Depot generated around 68 billion dollars in sales with the advantage of having roughly 500 more stores than Lowe s. It has a more heavy duty image compared to Lowe s, with gigantic warehouses aimed towards contractors and professional. Expansion has slowed in the past few years as number of stores have stayed roughly constant. Home Depot is at the mature stage of its life cycle and is focusing on maintaining strong sales rather than expanding further in the United States. Fastenal (NYSE: FAST) Fastenal is a wholesaler and retailer of industrial and construction supplies. Fastenal also provides inventory management services. It has 2,500 retail stores in North America and Mexico that sell literally anything that involves nuts and bolts. Fastenal focuses on the industrial products rather than consumer products such as appliances. Fastenal was added to the S&P 500 index in late 2008. Sherwin-Williams (NYSE: SHW) Sherwin-Williams offers industrial paints for professional and commercial use. Its primary brands are Sherwin- Williams, Dutch Boy, Krylon, Minwax, and Thompson s Water seal, all professional industrial paint and sealing products. SHW sells to retailers, dealers and other third party distributors. They operate 3,390 specialty paint stores and 564 branches all over North and South America, the Caribbean region, Europe, and Asia. Menards Menards is privately owned by President, CEO, and founder John Menard. It is one of the largest home improvement chains in the Midwest region with 250 stores. The stores sell home improvement products, such as floor coverings, hardware, millwork, paint, and tools. Unlike its competitors, all branches of Menards have full-service lumberyards. Its biggest rivals are Home Depot and Lowe s, who have been slowly taking over its turf. Ace Hardware Ace was founded in 1924 by a group of Chicago hardware store owners. Ace is not publicly traded and wholly owned by its independent store owners. Ace Hardware is on top in sales for hardware stores in the United 19 Yahoo! Finance 20 Yahoo! Business 21 Sears Holdings 12

States, ahead of Do It Best. Ace Hardware is made up of 4,400 independently owned hardware stores, building material locations, and home centers in 50 US states and 60 other countries. Stores are wide-ranging from small local hardware stores to large home centers in rural areas. Ace also has 15 warehouses that distribute supplies, equipment, housewares, and power tools. It also manufactures and sells paint. Sears, Roebuck and Co. 22 23 Sears, Roebuck and Co. is a subsidiary of Sears holdings that operates 900 independently owned Sears Hometown Stores in small towns and 90 Orchard Supply Hardware shops. It also offers its brands through online services such as sears.com, landsend.com and specialty catalogs. Sears leading brands include Kenmore, Craftsman, and PartsDirect. Sears, Roebuck is the 2011 Energy Star Retail Partner of the Year. 24 25 26 Do it Best Do it Best is a privately owned hardware store and home center founded in 1945. Formally named as Hardware Wholesalers, it prides itself in being the World s Largest Hardware Store with more than 4,000 memberowned stores in 50-plus countries worldwide, but primarily the US. It recently led overseas expansion to Indonesia by opening home centers and plans to open a total of 40 Do it Best stores over the next five years. Do it Best offers the usual tools and materials but also offers other consumer products like automotive products, bicycles, camping gear, office supplies and small appliances. Customers can also use Do it Best s website to have products shipped to their local stores. 22 Sears Holdings 23 Bloomberg.com 24 Homechannelnews.com 25 Privco.com 26 Allbusiness.com 13

Quantitative Analysis Economic Value Added 27 28 29 Shares Outstanding 1,260,000,000.00 Share Price 20.53 Market Cap 25,867,800,000.00 Long Term Debt 6,537,000,000.00 Total Capital 32,404,800,000.00 Percent of Debt 20.17% Percent of Equity 79.83% Risk Free Rate 2.18% Risk Premium 6.00% Beta 1.07 Cost of Equity 8.60% After- Tax Cost of Debt 3.50% WACC 7.57% NOPAT 2,328,240,000.00 Beginning BV of Capital 7,225,000,000.00 Return on Capital 32.22% (ROC-WACC) 24.65% EVA 1,781,222,230.87 EVA per share 0.71 27 2010 Annual Report to Lowe s Shareholders 28 http://www.treasury.gov 29 http://seekingalpha.com 14

Economic Profit, or economic value added, reflects the value created each year by deducting a capital charge from the net operating profit after taxes for the period. The analysis above is based on the following expression: EVA=NOPAT (k x Capital) In order to compute EVA it is imperative to utilize relevant and accurate inputs. The net operating profit after taxes for Lowes was computed by multiplying earnings before interest and taxes by the result of one minus the marginal tax rate of 34.6%, the corporate tax rate applied to corporations last year in the United States. The weighted average cost of capital method was used to obtain the cost of capital for Lowes. This figure is a weighted calculation of the cost of capital for the firm. The Capital Asset Pricing Model (k=rf + (Market Premium)β) was used to obtain the cost of equity of LOW.The current 10- year yield on U.S. treasury bonds was used as the Risk free rate. This long term yield is an effective input due to the fact that it represents a maturity similar to the long term investments of the company. We chose to utilize a forward looking risk premium figure by averaging predictions made by professors, companies, and analysts and adding an additional 56 basis points to the average due to recent volatility in the market enabling the group to arrive at 6%. The beta applied to Lowes was the same figure published on Yahoo! Finance. To arrive at the cost of debt for the company a weighted average was computed utilizing rates on long term notes shown in the 2010 annual report to shareholders. The relative weights were applied to the figures to reach a weighted average cost of capital value of 7.57%. In order to discover the rate of return on capital for the period, the NOPAT figure must be applied to the book value of the capital in use. The beginning book value of the capital includes all equity at par value as well as total long term debt on January, 28 2011. The current shares outstanding and price per share for Lowe s common stock was taken off of Yahoo! Finance on October, 12 2011. 15

30 31 32 Financial Ratio Analysis Liquidity: Average Lowe s underperformed Home Depot in current ratio from 2006 to 2009. Last year Lowe s showed a higher ratio of 1.4 versus 1.33 for Home Depot. Although Home Depot has outperformed Lowe s on a historical basis, Lowe s would not have a problem paying off current liabilities with current assets. An average liquidity rating was given to Lowe s because it does not surpass Home Depot s liquidity, yet it would still be able to pay of current liabilities. Current Ratio Lowes 1.27 1.12 1.153 1.32 1.4 Home Depot 1.39 1.15 1.198 1.34 1.33 As far as quick ratio, Lowe s would find itself in big problems trying to payoff current liabilities. Lowe s liquidity heavily declined because of its large inventory. Large inventories tend to be typical in large retailers; therefore one must not completely trust this ratio as an accurate measure of both Home Depot and Lowe s. Nonetheless, Lowe s has lower liquidity than its main competitor. If one assumes that inventories are not highly liquid, then both Lowe s and Home Depot would be categorized as risky investments due to the lack of funds to cover current liabilities. Quick Ratio Lowes 0.1789 0.1387 0.1299 0.2016 0.23 Home Depot 0.4 0.23 0.24 0.358 0.282 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Current Ratio Quick Ratio 30 Morningstar.com Lowe s Financials 31 Morningstar.com Home Depot Financials 32 Investopedia.com--Definitions 16

Asset Management: Average Both Lowe s and Home Depot have seen day sales of inventory (DSI) increase over the past five years. This is more than likely due to the bleak economic conditions from 2007 to 2009. Aside from that, Home Depot has been superior at converting their inventory into sales at around 87 days in 2010. Lowe s on the other hand saw 85 DSI in 2006 increase to about 96, an 11 day increase, a signal of poor inventory management in addition to worsening economic conditions. Day Sales of Inventory (DSI) Lowes 84.86 88.03 94.43 97.89 95.92 Home Depot 76.65 83.38 82.36 84.97 86.77 Home Depot is once again superior to Lowe s in inventory turnover. Lowe s low inventory turnover in the recent years is possibly due to poor sales and excess inventory. Overall, both DSI and Inventory turnover should be considered, but at the same time one must keep in mind that slowing sales will cause both ratios to be off balance. In case of an economic upturn, these two ratios should go back to lower levels. Inventory Turnover Lowes 4.44 4.28 4.01 3.74 3.82 Home Depot 5.04 4.18 4.22 4.2 4.29 In Fixed Asset Turnover (FATO) and Total Asset Turnover (TATO), both companies experienced a slight decrease from 2006-2009. Then, in 2010 both companies reported higher ratios than the previous year. Home Depot and Lowe s are close together in these two sectors, and once again something to keep in mind is the slowing of sales over the recession period. The ratios are not really helped by the fact that both companies increased their number of fixed assets and total assets over the past years. Overall, both companies asset management ratios have suffered due to the recession and therefore the data presented undervalues the actual potential for both companies. Fixed Asset Turnover (FATO) Lowes 2.66 2.39 2.19 2.09 2.19 Home Depot 3.53 2.86 2.65 2.56 2.69 Total Asset Turnover (TATO) Lowes 1.69 1.56 1.47 1.43 1.45 Home Depot 1.74 1.74 1.73 1.62 1.69 17

5 4.5 4 3.5 3 2.5 2 1.5 Inv. Turnover FATO TATO 1 0.5 0 Profitability: Improving Lowe s outperforms Home Depot across the board by about 1% every year. In spite of the recession, Lowe s sales were fairly stable on the 5 year chart in comparison with Home Depot which suffered a huge decline in sales from $90,837 million in 2006 to about $67,997 million at the end of 2010. The ratios between Lowe s and Home Depot are highly correlated, yet their sales show a different story. People still buy at Lowes over the 5 year period, but $22,840 million of sales were lost in a 5 year period for Home Depot. Gross Profit Margin Lowes 34.52% 34.64% 34.21% 34.86% 35.14% Home Depot 32.79% 33.61% 33.65% 33.87% 34.27% A well-established operating margin is necessary for a company to pay off fixed costs such as interest on debt. Lowe s revenue, as mentioned earlier, stayed at normal levels while its operating expenses increased from $11,046 million in 2006 to $13,592 million in 2010. On the other hand, Home Depot managed to reduce operating expense from $20,110 million in 2006 to $17,465 million in 2010. This clearly indicates that Lowe s management was poor at controlling operating expense and hence underperforming Home Depot after 2008. Operating Margin Lowes 10.98% 9.74% 7.85% 6.59% 7.29% Home Depot 10.65% 9.36% 6.11% 7.26% 8.59% 18

Net profit margin is a good measure of how effective a company is at overall cost control. Recently, Home Depot has been better at cost control by reducing interest expense from 2009 to 2010. During the previous three years, Lowe s slightly outperformed Home Depot but no significant results stood out. Net Profit Margin Lowes 6.62% 5.82% 4.55% 3.78% 4.12% Home Depot 6.34% 5.68% 3.17% 4.02% 4.91% Lowe s edged Home Depot during 2006 and 2008 by a small margin, while in 2007, 2009 and 2010 Home Depot took the lead in ROA. One key to Home Depot s success in converting assets into profit was the sharp decline in receivables from 2006 to 2007. Home Depot was able to reduce its total assets by over $10,000 million and still managed to recover to an ROA of 8.32% in 2010. This shows that management was able to employ fewer assets to generate more profits. On the other hand, Lowe s increased its total assets from $27,767 million in 2006 to $33,005 million in 2010, yet its net income was not able to keep up to par and thus caused ROA to decline from 11.18% in 2006 to 5.96% in 2010. This is a signal that management is employing too many assets and not generating profits from them (i.e.: idle assets). Return on Assets Lowes 11.18% 9.10% 6.72% 5.40% 5.96% Home Depot 11.02% 9.92% 5.49% 6.51% 8.32% Return on Equity Lowes 19.80% 17.43% 12.11% 9.35% 11.11% Home Depot 22.95% 24.71% 12.72% 13.74% 17.59% This situation is quite similar to that of return on assets but this time Home Depot outperforms Lowe s by a far margin over the past 5 years. By looking at each of the company s balance sheets, one can see that Home Depot was able to use less money invested by shareholders but still managed to outperform Lowe s. Lowe s, on the other hand, had a steady growth in stockholders equity, but once again net income was unable to keep up to par and thus return on equity showed a large drop from 19.80% in 2006 to 11.11% in 2010. Home Depot had a large drop as well but is now on its way to recovery which indicates that the company is adding value to shareholder s investments. 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% GPM OM NPM ROA ROE 19

Debt Management: Good Lowe s is by far superior to Home Depot in debt management. Aside from 2007, Lowe s debt ratio has been well under 1.00 which means that the company possesses more assets than debt. As far as risk goes, we could assume that Lowe s is a safe investment compared to Home Depot whose lowest reported debt ratio was in 2006 (1.09). Lowe s also finances most of its assets with equity rather than debt, but Home Depot s debt to equity ratios for the past five years are over.50, a signal that assets are being managed by too much debt and therefore could cause volatile earnings due to interest expense. Debt Ratio LOW 0.43 0.48 0.45 0.42 0.46 HD 0.52 0.60 0.57 0.53 0.53 Debt to Equity LOW 0.77 0.92 0.81 0.73 0.86 HD 1.09 1.50 1.32 1.11 1.12 Times Interest Earned LOW 25.26 19.87 11.96 10.29 10.38 HD 24.74 10.78 6.67 6.95 10.95 Finally, Lowe s has a better track record when it comes to Times Interest Earned (TIER). The previous two ratios basically explain why Lowe s is able to pay off their interest expense more times over than Home Depot. Overall, we think that Lowe s is doing a superb job at managing their debt and it can be classified as a safe investment. 1.00 0.80 0.60 0.40 Debt Ratio Debt to Equity 0.20 0.00 20

Three Step DuPont Analysis: Improving ROE for both companies has decrease over the past five years, but are turning right back around. Net Profit Margin has been constantly underperforming for the past 5 years; in fact it has decreased from 6.62% in 2006 to 4.12% in 2010. Although ROE increased last year, one can see that it is mostly due to an increase in leverage. Both companies seem to follow the same ROE pattern over the last year, and show slight promise for improvement in operating and asset management efficiency. ROE without debt gives a closer look at both companies actual return without financial leverage multiplier. One can see that Lowe s and Home Depot get much closer on ROE without debt, this shows that Lowe s is better at managing their debt and actually generating return from their assets and sales. Extended DuPont Lowes Net Profit Margin 6.62% 5.82% 4.55% 3.78% 4.12% TATO 1.69 1.56 1.47 1.43 1.45 Equity Multiplier 1.77 1.92 1.81 1.73 1.86 ROE 19.80% 17.43% 12.11% 9.35% 11.11% ROE w/out debt 11.19% 9.08% 6.69% 5.41% 5.97% Extended DuPont Home Depot Net Profit Margin 6.34% 5.68% 3.17% 4.02% 4.91% TATO 1.74 1.74 1.73 1.62 1.69 Equity Multiplier 2.08 2.5 2.32 2.11 2.12 ROE 22.95% 24.71% 12.72% 13.74% 17.59% ROE w/out debt 11.03% 9.88% 5.48% 6.51% 8.30% 25.00% 20.00% 15.00% 10.00% ROE ROE w/out debt 5.00% 0.00% 21

Pro Forma Income Statements Lowe's Companies Inc. Consolidated Pro Forma Income Statement For the Year Ended Jan. 31, 2012 (In millions) Q1- Actual Q2- Actual Q3- Estimate Q4- Estimate Year Estimate Revenue 12,185.00 14,543.00 11,818.81 10,506.09 49,052.90 COGS 7,866.00 9,527.00 7,721.23 6,863.63 31,977.85 Gross Profit $4,319.00 $5,016.00 $4,097.58 $3,642.46 $17,075.04 Operating Expenses Sales, Gen. & Admin. 3120 3232 2,906.24 2,583.45 11841.69 Depreciation & Amortization 371 365 392.38 348.80 1477.19 Operating Income $828.00 $1,419.00 $798.95 $710.21 $3,756.16 Interest Expense 94 92 93 93 372 Other Income (Expense) 6 2 2 2 12 Income Before Tax $740.00 $1,329.00 $707.95 $619.21 $3,396.16 Income Tax 279 499 267.11 233.63 1278.74 Net Income $461.00 $830.00 $440.84 $385.58 $2,117.42 EPS 0.35 0.65 0.35 0.31 1.66 Shares Outstanding 1,260,527,156 1,260,527,156 1,260,527,156 1,260,527,156 1,260,527,156 Q3 & Q4 estimates: For the 2011 Q3 sales estimate, we weighted the sales growth rates in 2010 (Q3) at 40%, 2009 (Q3) at 30%, and 2006-2008 (Q3) at 10% each. We then calculated the weighted average (-18.732%) and used that for our Q3 (2011) estimate. This method gave us a value that took seasonality and recent economic trends into consideration. For COGS we took the average of the last five years percentage of sales (65.33%), and used that percentage for Q3 2011 estimate. For SG&A we used 2010 percentage of sales (24.59%) for the Q3 estimate. For Depreciation & Amortization account, we only took into account the most recent three years. The percentage of sales average (3.32%) for the three years was used to calculate Q3 estimate. For interest expense, we simply took the average interest expense for 2011 Q1&Q2 actual to arrive at ($93 in millions) Q3 estimate. For the Other Income (expense) account we took 2011 Q2 ($2 million) for Q3 estimate. Income tax was obtained from 2011 Q2-actual (37.73%). We estimated EPS for 2011 Q3 to be.348, which is close to Value Line s prediction of.35. For the 2011 Q4 sales estimate, we weighted 2010 (Q4) at 40%, 2009 (Q4) at 30%, and 2007-2008 (Q4) at 15% each. For the rest of the accounts we used the same methodology as for Q3 estimates. We believe that the methodology used is still relevant for the Q4 estimate. 22

Lowe's Companies Inc. Consolidated Pro Forma Income Statement For the Year Ended Jan. 31, 2013 (In millions) 2011 2012 Pessimistic Most Likely Revenue 49,052.90 48,535.31 50,292.96 COGS 31,977.85 31,679.00 32,690.42 Gross Profit $17,075.04 $16,856.31 $17,602.54 Operating Expenses Sales, Gen. & Admin. 11841.69 12322.46 12,286.57 Depreciation & Amortization 1477.19 1526.23 1,503.76 Total Operating Expenses $13,318.88 $13,848.69 $13,790.33 Operating Income $3,756.16 $3,007.62 $3,812.21 Interest Expense 372 421.25 352.05 Other Income (Expense) 12 5.91 10.06 Total Non Operating Expense $360.00 $415.35 $362.11 Income Before Tax $3,396.16 $2,592.27 $3,450.10 Income Tax $1,278.74 $977.29 $1,300.69 Net Income $2,117.42 $1,614.99 $2,149.41 EPS 1.66 1.28 1.71 Shares Outstanding (Aug, 2011) 1,260,527,156 1,260,527,156.00 1,260,527,156.00 2012 Year Estimate - Pessimistic: A similar method was used to forecast revenue for 2012. The following weights were assigned to the five most recent year-end revenues: 2011 estimate (40%), 2010 actual (30%), 2009 actual (20%) and 2007-2008 (5% each). This resulted in total revenue for the 2012 of $48,535.31 million, an overall decrease in sales of 1.06% from our 2011 year-end estimate. Note that, 2009 revenue was weighted at 20% (recessionary year). Considering that Lowe s revenue fell by 2.09% from 2008-2009, we can safely assume that during a double-dip recession scenario, Lowe s would experience yet another decrease in revenue. For COGS, the average of the last five years (including 2011 estimate) percentage of sales was used (65.27%). By looking at the last few years, one can see that COGS has been fairly stable. Even during a pessimistic scenario, we believe that COGS will follow the ups and downs of revenue. For the years of 2008-2010, SG&A averaged an increase of 4.06%. For this estimate, we are assuming that the trend will continue due to bad expense management. Our 2011 year-end estimate and 2007 actual were disregarded due to an unusual decrease and increase in SG&A. Depreciation & Amortization account was calculated by averaging the last three (actual) year-end percentages of sales. 23

Interest expense over the last five years has been highly volatile and increasing. We decided to take an average of the increase on interest expense over those 5 years (13.24%). We believe that this accurately represents the recent upward trend in interest expense. Other income has been decreasing over the last five years, and it took a sharp decline during recessionary years (-50.78%). In case of a double-dip recession, other income will more than likely be reduced by that percentage. For 2012 we are assuming that Lowe s tax rate will be 37.7% based on ValueLine s prediction. Our estimated pessimistic scenario EPS, we consider to be accurate in case of an economic downturn. 2012 Year Estimate - Most Likely: In calculating the most likely scenario, we observed the last 5 years from 2007 to 2011. We isolated the separated annual growth rates to calculate a weighted moving average to find the appropriate sales growth percentage for 2012. We did not include the negative sales growth in the year of 2009 because we felt it was an outlier. We then weighted the growth rates starting from the most recent year at 50%, 30% and 20%. We weighted the most recent year at 50% because we anticipate sales to continue growing in 2012. We also included the slightly negative growth rate in 2008 to account for a relatively small risk and looming recessionary effects. The weighted average resulted in a positive sales growth of 2.528% In calculating the pro forma cost of goods sold, we calculated an average of the last two years to find 65.0% of sales to be cost of goods sold. We took into account the decrease in expenses as a percentage of sales in the last year. We feel by utilizing these negative changes, we reflect management s efforts to cut costs wherever possible. We saw a negative change in expenses of -.656% which when applied to the previous year, it resulted a SG&A of 24.43% as a percentage of sales in 2012. This method was replicated in calculating 2012 Depreciation & Amortization. We calculated a negative growth rate of -7.67% in Depreciation & Amortization which totaled to a 2.99% as a percentage of sales in 2012. We observed a trend in interest expense and other income, and felt that debt and other income would remain constant. We decided to keep an interest expense of 0.7% of sales and other income of.02% of sales. In calculating income tax expense, we used ValueLine s tax rate prediction of 37.7%. The income tax totaled to 1,300,690,000 and a net income of 2,149,410,000. This method gave us an earnings per share of 1.71. 24

P/E Valuation Historic P/E Multiples Average LOW 15.4 11.5 13 19.8 18.6 15.66 HD 13.7 10.7 13 21.1 19.2 15.54 SHW 15.4 12.3 14.9 16.3 19.9 15.76 FAST 27.2 26.1 18.6 33.6 33.3 27.76 Peer Average 17.92 15.15 14.88 22.7 22.75 18.68 S&P500 16.8 16.5 10.9 18.6 15.5 15.66 Historic P/E Multiples: Lowes Companies Inc. currently has a higher P/E ratio than its main competitor reflecting the market s optimism about future earnings in the future. Forward Looking Valuation Measures PEG Ratio (5 years) Forward P/E Ratio (FYE January 2013) LOW 1.01 11.82 HD 1.08 13.13 SHW 1.66 14.61 FAST 1.73 23.86 Peer Average 1.37 15.855 PEG Forward Looking Valuation Measures: Looking at the forward P/E ratio, we agree that the Lowe s is undervalued and while still maintaining high growth prospects. To complete the P/E valuation our group utilized the earnings per share values found in the 2012 Pro forma income statement. We found it best to calculated the average historical P/E multiples for Lowes and use that value in our most likely scenario. In order to obtain a pessimistic multiple, we subtracted one standard deviation from the average resulting in a multiple of 13.12. 2012 P/E Valuation Pessimistic Most Likely EPS $1.28 $1.71 P/E multiple 13.12 15.66 Price Per Share $16.79 $26.78 Probability 20% 80% Weighted Average Price $24.78 Current Price $20.93 Margin Of Safety 18.40% 25

To complete the P/E valuation our group utilized the earnings per share values found in the 2012 Pro forma income statement. We found it best to calculated the average historical P/E multiples for Lowes and use that value in our most likely scenario. In order to obtain a pessimistic multiple, we subtracted one standard deviation from the average resulting in a multiple of 13.12. P/S Valuation Historic P/S Multiples Average LOW 1.0 0.7 0.7 0.7 0.7 0.76 HD 0.9 0.6 0.5 0.7 0.9 0.72 SHW 1.1 0.9 0.9 1.0 1.2 1.02 FAST 3.0 3.0 2.2 3.2 3.9 3.06 Peer Average 1.5 1.3 1.075 1.4 1.675 1.39 S&P500 1.6 1.5 0.9 1.2 1.3 1.3 Historic P/S Multiples: Historically, Lowes has been favorably priced in terms of sales per share compared to their main competitor. In order to obtain the necessary forward P/S multiple for Lowes, the expected 2012 revenues given by Reuters were applied to the current shares outstanding. Expected 2012 Revenue (mil) Forward P/S Multiples Shares Outstanding Sales Per (mil) Share Current Price Forward P/S Multiple LOW 50,596.40 1,260.53 40.14 20.93 0.52 HD 71,948.90 1,564.29 45.99 35.05 0.76 SHW 9,195.25 106.28 86.52 80.04 0.93 FAST 3,100.63 295.2 10.50 33.4 3.18 Peer Average 33,710.30 806.58 45.79 42.355 1.35 Forward P/S Multiples: In order to complete this valuation, our group inserted our projected revenue figures given in the 2012 Pro forma income statement. The forward P/S multiple was utilized in the pessimistic scenario, while the most recent historical multiple was used under for our most likely projection. 26

2012 P/S Valuation Pessimistic Most Likely Sales $48,535.31 $50,292.96 Shares Outstanding 1,260.53 1,260.53 Sales Per Share $38.50 $39.90 P/S Multiple 0.52 0.7 Price Per Share $20.02 $27.93 Probability 20% 80% Weighted Average Price $26.35 Current Price $20.93 Margin of Safety 25.89% P/B Valuation Historic P/B Multiples Average LOW 3.1 2.1 1.8 1.8 1.8 2.12 HD 3.0 2.6 2.1 2.5 3.0 2.64 SHW 5.6 5.0 5.0 5.3 6.4 5.46 FAST 5.9 6.0 4.5 5.2 6.9 5.70 Peer Average 4.40 3.93 3.35 3.70 4.53 3.98 S&P500 2.9 5.3 1.7 2.2 2.2 2.86 Historic P/B Multiples: This table shows the average P/B multiples of the last five years. LOW has a slightly lower average P/B multiple Forward P/B Multiples Expected 2012 Book Value Per Share Current Price Forward P/B LOW 14.35 20.93 1.46 HD 12.70 35.05 2.76 SHW 18.80 80.04 4.26 FAST 5.65 33.40 5.91 Average 3.60 Forward P/B Multiples: We used the expected book value per share in 2012 from Lowe s ValueLine profile. We applied it to the current price of 20.93 (Price closed on 10/14/2011) to find the Forward P/B multiple. 27

2012 P/B Valuation Pessimistic Most Likely Book Value $16,865,891,400.00 $18,088,605,500.00 Shares Outstanding 1,260,530,000.00 1,260,530,000.00 Book Value Per Share $13.38 $14.35 P/B Multiple 1.8 2.12 Price Per Share $24.08 $30.42 Probability 20.00% 80.00% Weighted Average Price $29.15 Current Price $20.93 Margin of Safety 39.29% 2012 P/B Valuation: To find the pessimistic value, we used the book value per share and P/B multiple from 2010 which were appropriate if there was no growth from 2010. To find the most likely value, an average of the P/B multiples from the last 5 years was used and the expected 2012 P/B multiple from ValueLine. 28