Lowe’s Company Inc.

Steven Law Stevenlaw@charter.net Cody Lummus Codylummus@gmail.com Trent Gray Trent.Gray@ttu.edu Andrew Landgraf Andrewlandgraf@yahoo.com Kyle Keltz Kyle.Keltz@ttu.edu

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TABLE OF CONTENTS

Executive Summary 2

Company Overview 3

Industry Overview 5

Five-Factor Model:

Rivalry Among Existing Firms 6

Threat of New Entrants 13

Threat of Substitute Products 15

Bargaining Power of Buyers 17

Bargaining Power of Suppliers 18

Value Chain Analysis 19

Firm Competitive Advantage Analysis 24

Formal Accounting Analysis 28

Key Accounting Policies 28

Potential Accounting Flexibility 32

Actual Accounting Strategy 34

Quality of Disclosure 36

Qualitative Analysis of Disclosure 36

Quantitative Analysis of Disclosure 39

Sales Diagnostics 39

Expense Diagnostics 47

Potential Red Flags 54

Accounting Distortions 54

Financial Analysis 56

Liquidity Ratios 57

Profitability Ratios 66

Capital Structure Ratios 75

Financial Statement Analysis 91

Income Statement 91

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Balance Sheet 93

Statement of Cash Flows 96

Analysis of Valuations

Weighted Average Cost of Capital 99

Cost of Equity 100

Cost of Debt 101

Intrinsic Valuations 102

Discounted Dividend Model 102

Discounted Free Cash Flows Model 104

Residual Income Model 106

Long-Run Residual Income 108

Abnormal Earnings Growth 110

Credit Analysis 113

Analysis of Valuation 113

Method of Comparables 114

Appendix 124

Liquidity Ratio 124

Profitability Ratio 125

Working Capital Ratio 127

Regression Analysis 128

Cost of Equity 139

Cost of Debt WACC 140

Discounted Dividends Model 141

Discounted Free Cash Flows Model 142

Residual Income Model 143

Long-Run Residual Income Model 144

Abnormal Earnings Growth Model 145

Altman’s Z-Score 146

Sales Manipulation Diagnostic 147

Core Expenses Manipulation Diagnostic 148

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References 149

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Executive Summary Investment Recommendation:Fairly Valued, Hold (November 1, 2007)

LOW – NYSE (11/1/2007): $26.15 52 week range: $21.76-$35.74 Revenue: $46,927 M Market Cap: $44 B Shares Outstanding: 1525 B Percent Institutional Ownership: 81.5% Book Value Per Share: $10.31 ROE: 18% ROA: 12.6% Cost of Capital est. R^2 Beta Ke Estimated: 3-month .11222 1.01 9.43% 1 year .11223 1.01 12.22% 2 year .1115 1.01 12.09% 5 year .1097 1.00 12.20% 7 year .1091 1.00 12.33% 10 year .1087 0.99 12.44% Published Beta: 1.31 Kd(BT): 5.07% Kd(AT): 3.3% WACC(BT): 9.12% WACC(AT):8.35%

Altman’s Z-Score 2002 2003 2004 2005 2006 5.43 6.33 8.33 8.85 5.47 Valuation Estimates: Actual Share Price: $26.15 Financial Based Valuations: Trailing P/E: $28.94 Forward P/E: $27.77 P.E.G.: $30.36 P/B: $39.17 P/EBITDA: $25.18 P/FCF: $68.67 EV/EBITDA: $22.79 D/P: $10.52 Intrinsic Valuations: Free Cash Flow: $43.52 Residual Income: $25.30 LR ROE: $15.97 Discounted Dividend: $8.41 AEG: $33.32

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Industry Analysis Lowe’s started out in 1952 in North Wilkesboro, North Carolina as a small

town home improvement store that’s big customer base was local contractors.

Now Lowe’s is the seventh largest retailer in the United States and is the second

largest retail home improvement retailer behind Home Depot. After building

their firsts modern stores in 1994, with low prices on the best products that all

customers can be satisfied with to improve their home, they have grown to 1385

stores in the United States and plan on expanding into Canada and Mexico.

While Home Depot and Lowe’s control most of the home improvement

market, Sherwin William’s and Tractor Supply also compete in this industry. The

reason they are in control of the industry is they make available products to all

ranges of customers from electricians to landscapers. Their competitors stick to

a smaller portion of the market as Sherwin William’s is mainly a paint supplier

and Tractor Supply to the rural population. The home improvement industry has

low switching costs, a low differentiation of products, large economies of scale,

and a low threat of substitute products making low prices very important to

compete in this industry. The bargaining power of suppliers is very low in this

industry as suppliers actually have to fill out an application to supply to Home

Depot, Lowe’s, Tractor Supply, and Sherwin William’s makes most of their own

product.

The main drivers in this industry to compete and grow are to be able to

have admirable cost control, economies of scale, and a supply of good quality

products. Having good cost control will keep costs of products low and help

customers save money. With low prices and superior products Lowe’s will keep

expanding internationally and take more market share from the other

competitors in the retail home improvement industry.

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Accounting Analysis

The accounting information released by a company is very essential in

valuing a company. To be valued correctly, the company should be transparent

by not hiding anything and have no apparent “red flags”. GAAP, Generally

Accepted Accounting Principles, has regulations on financial statements, but rules

can always be flexible as managers for companies can make their numbers look

better than they really are.

To find the financial statements for Lowe’s we looked at their 10-K, which

showed to have sufficient information. The way leases are recorded is a big part

of key accounting policies for a company. Lowe’s, as stated in their 10-K, owns

a majority of their stores and we felt that the capital and operating leases on the

remaining percentage would not drastically affect the balance sheet. Deferred

revenues can also be another flexible part of a balance sheet, but Lowe’s has

accurate numbers for their gift cards and installation work in the 10-K. The only

possible flexibility they could have stretched is pension plans as they would have

to predict the discount rate and the how much money employees contribute to

their plans.

Lowe’s has also entered into an agreement with GE, and has GE servicing

the accounts receivable, and records any gains or losses at fair value. This helps

Lowe’s by having them not record any allowance for bad debt during this

agreement which creates clearer forecasts for future cash flows. Lowe’s

accounting principles are above the standard and have no real potential “red

flags” that would give a bad valuation for the company. The only possible one

listed above was the operating leases, but since the payments are spread out

over many years, we show that on a yearly basis the balance sheet would not be

severely affected.

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Financial Analysis, Forecast Financials, and Cost of Capital Estimation

The financial analysis of Lowe’s reveals how ratios can be used to break

down numbers on the financial statements. These ratios can then be compared

to other competitors and the industry to determine the company’s liquidity,

capital structure, and profitability. First, when doing the liquidity analysis of

Lowe’s it can be seen that they are a very liquid company. In most of the ratios

Lowe’s stayed consistent with the industry or led the industry such as the case

with inventory turnover. This is important because they can quickly sell their

inventory which creates greater operating efficiency. The overall capital

structure analysis found ratios that again showed Lowe’s as a healthy company.

These ratios show that as Lowe’s expands and grows, they are doing a good job

to maintain consistency in their funding. Overall capital structure indicates that

the entire industry is able to cover their liabilities with sources of cash or incomes

showing there is little credit risk in the industry. The profitability ratio analysis

illustrates that Lowe’s is outperforming the industry as a whole for the return on

equity and return on assets. Furthermore, Lowe’s has performed consistent with

the home improvement retail industry for the gross profit margin, operating

profit margin, asset turnover, and net profit margin ratios.

Forecasting a firm’s financial statements can make analyzing its value

easier by providing a tangible view of its future numbers. To forecast Lowe’s

income statement, balance sheet, and statement of cash flows, we first

forecasted its net sales growth. We did this using Lowe’s historical sales growth

over the past five years. By calculating the net sales growth we were able to

successfully forecast most of the remaining numbers using historical values and

comparing them to liquidity and profitability ratios. Owners’ equity was calculated

using our forecasted net earnings and dividends. The historical values we used

to determine our forecasts proved to be accurate except for one area: total

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liabilities. We had to adjust total liabilities to account for the values we

forecasted for owners’ equity using our forecasted dividends, which was different

from our forecasted owners’ equity using historical values. After the ratios were

calculated and the forecasts were done, the beta could be calculated using

regressions. Using the beta we could get the Ke using the CAPM equation, and

get the Kd using the liabilities off our balance sheet. After computing Ke and Kd

we plugged those into the WACC equation to get WACCbt and WACCat.

Valuations

Through our valuations we show that Lowe’s is a fairly valued company.

To value a stock you have to look at the current share price and compare certain

ratios to competitors, or use forecasted intrinsic values to see if the stock is

overvalued, undervalued, or fairly valued. We used method of comparables and

intrinsic valuations to derive this valuation.

For the method of comparables we got all but three to reach a fairly

valued conclusion. These five that valued the company well were the

Price/EBITDA, Forward P/E, Trailing P/E, Enterprise Value/EBITDA, and the Price

Earning Growth. The Dividend/Price model did not accurately value Lowe’s

because people do not buy Lowe’s for their dividends so it is not an accurate

comparable to look at. The Price/Book ratio and Price/Free Cash Flow were

undervalued, but since a majority of the valuations turned out to be fairly valued

we chose to favor that valuation for the method of comparables. The method of

comparables is one way to value a company, but we felt that the intrinsic values

were more reliable to make a final decision for our valuation.

The intrinsic valuations are Residual Income, Discounted Dividends, Free

Cash Flow, Long Run ROE, and Abnormal Earnings Growth. Lowe’s has mixed

results for these valuations as well as the method of comparables. The

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discounted dividends model was extremely overvalued, but as I mentioned

before Lowe’s is not a company that people invest in for dividends, so that

valuation is irrelevant. The free cash flow model is undervalued, which we also

felt was inaccurate. The long run ROE was overvalued throughout the whole

analysis but since that model deals with perpetuity it is not as accurate as the

residual income or AEG model. The AEG model was slightly undervalued but we

decided to go with residual income as it is known as a more reliable model and it

matches up with our method of comparables valuations. The share price for the

residual income model was $25.30 which is extremely close to the observed

share price of $26.15. In conclusion, the residual income model, being the most

accurate, shows that Lowe’s is a fairly valued company.

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Company Overview

Lowe’s started out in 1952 in North Wilkesboro, North Carolina, close to

their new headquarters of Moresville, North Carolina. They started out as a local

hardware store that had a main customer base of independent and professional

contractors. Lowe’s started to build their modern stores in 1994 and quickly

expanded into a home improvement retail store leader as they currently have

1385 stores running. Lowe’s sells thousands of products including special order

items on the internet or through the store. Lowe’s has announced that they are

expanding into Canada, building six to seven stores around the Toronto area.

Lowe’s has installation services for the do-it-for-me customers as well as

everything for the do-it-for-yourself customers. To meet these needs fully and to

stay on top Lowe’s uses, “excellent customer service, Everyday Low Prices, and

innovative operational, merchandising, marketing and distribution strategies”

(Lowe’s 10-K). Lowe’s carries a wide selection of well known brands that have

been used for years, as well as exclusive Lowe’s products that a number of

customers have been satisfied with. Lowe’s requires managers with great

training skills to train new employees the knowledge to help the customers and

give them a better experience shopping than at other home improvement retail

stores. While having low prices, Lowe’s still needs great customer service to

keep improving their sales and keep the customers coming back into the store.

The company also created a website called LowesForPros.com to gain some

business from commercial contractors. This website, “features up to date

articles, job estimators and business forms, e-newsletters, statistics and other

vital information that Commercial Business Customers can use for their business”

(Lowe’s 10-K).

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Lowe’s net sales have increased close to 18% every year for the past 5

years except for 2006 when it increased 8.5%. Expansion is a big part of Lowe’s

plan to grab more of the market share for home improvement and increase their

net sales. Stores are being built in Canada this year and there are stores in 49

states and Mexico. Lowe’s has also built 136, 147, and 151 new stores in each

of the past three years respectively. The company invests yearly in existing

stores to be touched up and to keep them looking inviting for customers.

Another good indicator of the size of a company is to look at its total assets. As

shown in the chart below Lowe’s has had a steady increase in total assets.

Lowe’s Asset Values

Year Total Assets

(in millions)

Percent Change From

Previous Year

2006 $27,767 11.11%

2005 $24,682 14.07%

2004 $21,209 10.22%

2003 $19,042 15.40%

2002 $16,109 N/A

www.lowes.com

Out of Lowe’s competitors in the retail home improvement industry they

have the second largest market cap of 44 billion. They are behind Home Depot

who leads the industry with a cap of 69.4 billion, then Sherwin Williams, and

Tractor Supply Co. in respective order. Lowe’s is trying to catch Home Depot as

the leader by continuous expansion and to keep the prices competitively low. As

mentioned above Lowe’s is opening several stores in Canada, they also plan on

opening up some new stores in Monterrey, Mexico in 2009. Home Depot already

has stores in Canada and Mexico, and has just acquired a home improvement

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firm in China that had 12 stores, Sherwin William’s has stores in South America,

United Kingdom, Mexico, and is expanding in Southeast Asia, and Tractor Supply

Co. is just based in the United States. Lowe’s expanding into Canada and later

into Mexico will increase their competition with Home Depot and should increase

their market share.

Lowe’s stock price performance has almost doubled in the last five years.

The stock price was at its lowest in the first quarter of 2003 at around $17 per

share and currently it is $30.60 per share. Lowe’s stock performance has been

consistent with the performance of the industry and also compared to their

competitors in the past five years as shown in the graph below

(www.finance.yahoo.com).

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Industry Overview

Lowe’s Companies, Inc. are in the home improvement retail industry.

Lowe’s is the second highest leader in the industry behind The Home Depot, Inc.

Other top firms in the industry include Sherwin-Williams Company, and Tractor

Supply Company. Recently, the housing market has been in decline and is

expected to continue until 2009 (Forbes.com). Despite the housing market,

sales in the home improvement industry are only falling by a small percentage.

Sales in the industry totaled 149.797 billion in the last twelve months. Lowe’s

accounted for 47.956 billion of those sales trailing The Home Depot which had

total sales of 84.079 billion. The Home Depot and Lowe’s are the major

competitors in the home improvement industry accounting for 88.14% of total

sales in the last twelve months.

Lowe’s and The Home Depot dominate the home improvement industry

due to the fact that their stores contain merchandise that meet the needs of

electricians, landscapers, painters, plumbers, repair and remolding contractors,

commercial property owners, and “do-it-yourself” homeowners and renters.

Other firms either cater to niche markets or are fairly new in the industry. For

example, House2Home, Inc. offers the same type of merchandise and services

as The Home Depot and Lowe’s, but was only formed in 1989, while Lowe’s was

incorporated in 1952. Similarly, Builders Firstsource issued their IPO only three

years ago. This means they are new still new in the home improvement

industry. Tractor Supply Company is the fifth leading firm in the industry

(Investor.Reuters.com), but it specializes in merchandise that fit the needs of

rural homeowners and farmers. Other firms such as Builders FirstSource and

Building Materials Holding Corporation only offer building supplies and materials,

and don’t sell interior goods.

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Five Forces Model

The Five Forces Model is an investment tool that allows investors to

classify the industries structure and profitability. The five forces consist of:

Rivalry among existing firms, threat of new entrants, threat of substitute

products, bargaining power of buyers, and bargaining power of suppliers. Below

is the Five Forces Model as it pertains to the retail home improvement industry.

Rivalry Among Existing Firms

The home improvement sector of retail has become a growing market

mostly dominated by two companies. A steady industrial growth over the last

ten years has made the home improvement sector very attractive to investors.

It is a highly competitive market emphasizing low costs and high quality.

However, the products offered in this industry have very little differentiation and

can be as generic as a two by four piece of wood. This sector of retail is highly

concentrated, creating an intense rivalry between the two largest competitors,

Home Depot and Lowe’s. Home Improvement stores can also be found all over

the country in “mom and pop” type establishments.

In addition, switching costs in the retail industry are historically low unless

there is some type of brand loyalty. For Lowe’s and the home improvement

sector, both companies carry identical or very similar products therefore

switching costs in this sector are low as well. Furthermore, a high fixed asset to

variable cost ratio shows that Lowe’s has exit barriers in the market.

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Industry Growth

The growth of an industry usually correlates directly with the leaders in

that industry. The home improvement sector of retail has experienced a high

level of growth over the past five years. The sales growth rate of this industry

reflects upon the management of these firms. The managers are responsible for

using these past industry growth rates in order to forecast a company’s future

sales and growth. Expansion into new cities and new markets is a direct result

of intense financial planning, taking all sales growth models into the process

Sales Growth Rate

2002 2003 2004 2005 2006

Lowe's 20.25% 18.10% 18.25% 18.50% 8.50%

Home Depot 8.77% 11.27% 12.80% 11.50% 11.40%

Sherwin-Williams 7.90% 4.30% 13.10% 17.60% 8.60%

Tractor Supply 20.02% 21.73% 18.06% 18.93% 14.59%

Weighted Industry Average 12.45% 13.17% 14.58% 14.11% 10.40%

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Through research and calculations of the industry growth the home

improvement industry averaged a growth rate over the past five years equal to

12.94%. This number is fairly high when considering inflation is approximately

three percent per year. The industry achieved this high growth rate due to the

expansion of all companies into new markets. By increasing the number of

stores, higher sales volume can be achieved. This growth rate shows that home

improvement has been expanding although there was a slight decline from 2005

to 2006. Lowe’s has managed to open new stores in cities nationwide and in

2006 planned to move into Mexico and Canada. This follows the precedent set

by The Home Depot who already has had great success in these countries.

Although most of Lowe’s competitors experienced growth in all of the last five

years, Tractor Supply had a negative growth rate in 2006. This was could have

been caused by the slow home building market at the time. While this company

relies on new construction of homes and general repairs to raise revenue Lowe’s,

The Home Depot, and Sherwin-Williams focus on do it yourself jobs for their

customers. This allowed them to maintain a relatively high growth rate during

the slow home building period.

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Conversely, all of the firms in this industry are also competing for market

share. To compete in the home improvement industry a company must be large

enough to compete on cost. Larger companies can buy more from suppliers

which enables them to receive the goods at a lower cost. Low prices have

always drawn many customers in the retail industry because customers know

they are saving money. Once you draw in buyers to the firm the more they will

spend which then increases growth. Also, a competitive advantage can be used

to draw customers away from competitors. When Lowe’s began to open up the

store with wider isles for convenience many buyers preferred to do their

shopping there. Minimizing cost and gaining a competitive advantage will allow

a firm to compete for market share in the retail industry.

Concentration

The concentration of an industry is directly related to the market share a

firm controls. The concentration of the home improvement retail industry is

measured by the number of existing companies and their market share. For

example, a low concentrated industry would consist of many firms each of which

having relatively equal market share. Although, a high market share enables a

firm to be more competitive.

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When analyzing the market share of these firms it was very clear that The

Home Depot stands out with the most market share. The graph shows that

between these four competitors the market share has been relatively constant

over the last five years. This is due to the level of growth the industry has

sustained over that time period. With an increase in the industry growth the

concentration level was able to remain constant because the firms were not

competing for market share.

The graph also shows that most of the industry is controlled by Home

Depot and Lowe’s. This gives them power in the industry, leading to a high level

of concentration. The two competitors face little competition from other firms

but remain competitive with each other. Furthermore, Home Depot has allowed

its market share to fall somewhat to Lowe’s in the past five years. Lowe’s is an

expanding company in the industry and will continue to pull some market share

away from Home Depot as they grow. Sherwin-Williams and Builders Firstsource

Market Share Analysis

0

10

20

30

40

50

60

70

2002 2003 2004 2005 2006

Year

Percentage of Market Share

Lowe'sHome DepotSherwin-WilliamsTractor Supply Co.

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are not likely to pull market share away from Home Depot or Lowe’s because of

the products they offer. Lowe’s and Home Depot offer a much wider variety of

goods while Sherwin-Williams and Builders Firstsource have limited selections of

home improvement goods.

Fixed Cost to Variable Cost Analysis

Variable costs are costs to a firm that fluctuate and change over time.

Examples of these would be materials costs and labor costs. Fixed costs are

those that do not change over time. An example of this would be a lease

payment for distribution centers. Lease payments are made for an agreed upon

time period and usually are renewed at the expiration date. When a company

has a low fixed to variable cost ratio they are provided with fewer exit barriers in

the industry. A high fixed to variable cost ratio is hinders a company’s ability to

cease operations. Also, the home improvement industry must allow for bad debt

just as all retail companies have to. This is a variable cost that is disputed and

allowed for every year. This cost is unavoidable because sometimes buyers are

just not willing or do not have the means to pay for their debt accounts.

Variable costs such as this are accounted for in the financial statements of all

companies. Most companies in the home improvement industry have high fixed

costs because of their lease payments. Upon analyzing the variable costs in the

industry, two significant variable costs were identified, debts payments and labor

costs. Larger companies in this industry have higher variable costs because they

employ more people resulting in high labor costs. Since the competitors in the

industry have low ratios it would be fairly easy for them to sell their inventory

and close their doors if the situation were ever to occur.

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Switching Costs

Switching costs in an industry come about by a low differentiation of

products. When switching costs are low a consumer can easily go through a

different company to get the same product. The home improvement retail

industry is characterized by low switching costs and low differentiation of

products. Lowe’s and Home Depot basically offer the same products and the

same brands. Other competitors such as Tractor Supply and Sherwin-Williams

offer specialty products that are aimed to compete with Lowe’s and Home

Depot’s similar items such as paint. This low differentiation of products enables

buyers to search for lower prices between companies. Unless a buyer is

extremely loyal to a certain brand or company, they would rather buy their

bucket of paint or power tools with the company with lower prices. The price

competition strategy is very important to Lowe’s and the companies in this

industry. To gain an advantage firms must regularly give sales on their products.

Once a customer feels that the company’s prices are usually the lowest the

switching costs are greatly reduced.

Excess Capacity

Companies experience excess capacity when the supply of goods exceeds

the demand for those goods. Firms that are large and have a bigger market

share usually do not have a problem with excess capacity. Sales and clearances

can be utilized by the firm to get rid of products that are not being sold regularly.

“Firms may also choose to maintain excess capacity as a part of a deliberate

strategy to deter or prevent entry of new firms” (http://stats.oecd.org/glossary).

This is a strategy that can benefit and be an annoyance to buyers. A large

corporation will lower its prices on these items eventually if it wants to maintain

their operating efficiency. However, preventing other entrants into the industry

gives a disadvantage to buyers because it creates less competition. Controlling

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excess capacity and the firm’s inventory is essential to keep the company

thriving.

Exit Barriers

Exit Barriers “are obstacles to market players who realize that they will not

turn a profit and would like to quit the market”

(http://www.photopla.net/wwp0503/exit.php). Closure Costs, asset write-offs,

and legal ramifications all create exit barriers for businesses. Closure costs

include contracts still pending with suppliers and penalty costs from canceling

lease agreements. The businesses in the home improvement industry would

experience these exit barriers due to their large number of suppliers whom they

have contracts outstanding as well as their operating lease agreements. The

most significant exit barrier for firms in the home improvement industry would be

their asset write-offs. Larger firms with a lot of fixed assets such as property,

plant, and equipment would incur a great expense to write-off these assets.

Smaller firms who lease buildings instead of owning the real estate would have a

fewer exit barriers than companies with large retail and distribution centers.

Threat of New Entrants

The threat of new entrants is a major factor in the business world, not

only will it affect a company but it also affects the entire industry. If an industry

is in high demand and there are upstart companies making solid yearly profits

this threat is usually very high and will continue to grow. During this section we

are going to explain how easy it is for competition to increase in an industry and

what that will do to the existing industry as a whole.

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Economies of Scale

In the retail home improvement industry new firms must come in with a

large amount of capital strength if they plan to sustain and be competitive with

the larger corporations. It is very difficult for the smaller firms to be competitive

because their money restraints do not allow them to buy large quantities of

products and distribute them as efficiently to all of the company’s stores. The

advantage the larger existing corporations have is being able to rely on their

capital strength and large economies of scale. The two largest and most

dominant retail home improvement corporations both have capital strength of

over $25 billion (www.scottrade.com). They also have better relationships with

distributors, which allow them to order larger quantities at a better price, which

in return helps make them much more price competitive. Finally, since Lowe’s

has been around since 1934 they have been able to learn and gain experience in

management and product distribution. This advantage helps the corporation be

much more cost effective because they have tested and developed the best

methods of distribution management. Since this industry has many different

ways they have to compete, the home improvement industry does have large

economies of scale.

Total Assets

2002 2003 2004 2005 2006

Lowe's 16,109 18,751 21,209 24,639 27,767

Home Depot 30,011 34,437 38,907 44,405 52,263

Sherwin Williams 3,432 3,682 4,274 4,369 4,995

Tractor Supply 458 538 678 814 1,007

* numbers in billions

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First Mover Advantage

The first mover advantage is a major key for corporations already in

existence. In many industries if the current major companies already present an

advantage in product invention/innovation than it will deter possible entrants in

the future. In the retail home improvement industry each company must keep up

with the current market to know exactly what the consumers want and need.

This way a corporation is able to stay more cost efficient and competitive by

knowing what products to order from their suppliers. Being cost efficient is a

major hurdle in breaking through and having a positive return on your assets. If

a new company is unable to negotiate a fair price with their supplier than as a

new entrant into the industry the company would not be able to survive. The

major companies such as Home Depot and Sherwin Williams have major

bargaining power with their suppliers because they have been in the industry so

long and have a great reputation with both their suppliers and their loyal

customers.

Distribution Access and Supplier Relationships

For first time entrants into the retail home improvement industry supplier

relationships is one of the toughest hurdles to overcome. The larger existing

firms, such as Lowe’s Company Inc. and Home Depot have great supplier

relationships that have been maturing for many years, some as far back as 1920.

These companies were able to build these relationships by making it a goal to be

loyal to their suppliers and use regional suppliers so that they help further their

communities by providing more jobs. With these types of relationships come a

certain amount of respect and loyalty to one another. Since there is such a large

amount of trust within the communities and their economies the larger firms are

able to receive price breaks because of the amount of products they buy on a

regular basis. New smaller firms find it difficult to build these deep relationships

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and as a result are not able to receive the price breaks on products, which hurts

them in the pricing wars seen throughout the retail industry.

Legal Barriers

In the retail home improvement industry there are very few legal barriers

that a company must face when entering into the industry. Many of the legalities

you see in the home improvement industry are seen throughout any business.

For example, new and existing companies alike must always meet government

regulations when importing and exporting goods. They also must meet

government working standards in factories overseas as well as on the mainland.

Other issues that arise are things internally within the company. Some of which

are sexual harassment, civil suits, and workers comp suits. In the retail home

improvement industry workers comp suits are seen on average more than any

other issue.

As you can see the home improvement industry is very difficult for new

entrants to succeed in. This industry is very “top heavy” and controlled primarily

two major corporations. These existing companies already have the established

relationships needed for them to keep good quality and pricing in their stores.

Without these competitive advantages it is very tough for a new firm to enter the

industry and compete successfully. Finally, any company no matter how big or

small must always be conscious of all the legal regulations that surround them.

Legal issues are major for any new entrant into an industry because they could

very easily violate laws and regulations that could close them down before they

even get started.

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Threat of Substitute Products The home improvement retail industry is comprised of two major firms

which compete relatively close with each other. With companies such as Lowe’s

and Home Depot taking a majority of the market share, the relative price of

home improvement products are very similar. Also, home improvement retail and

commercial business customers tend to be very loyal to brand and firms, so a

buyer’s willingness to switch in this industry is relatively small. This shows that

the threat of substitute products is relatively low considering home improvement

goods.

Relative Price and Performance

Customers in the home improvement retail industry understand they will

get what they pay for. These customers will obviously still be somewhat price

conscious, but most are very aware of the price and brand they are dealing with.

This tends to be a good thing for large existing firms such as Lowe’s and Home

Depot. The threat of a superior or cheaper product will be identified between

these large corporations before they have a chance to compete with price or

performance of the product. In turn, small home improvement retailers suffer

from customers being knowledgeable about what they are trying to attain

because they cannot compete with large firms cost advantages.

Buyers’ Willingness to Switch

A customer within the home improvement industry knows they will find

similar brands and prices in any of the large retail stores such as Lowe’s and

Home Depot. Consumers in this industry are willing to pay a premium for a

higher quality product. On the other hand, most customers know what they can

afford to spend less on within home improvement. As mentioned earlier, this is

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an industry dealing with a majority of knowledgeable consumers with a “Do-it-

yourself” attitude. Therefore, they would not be as open to switch products due

to price or brand detail.

In conclusion, due to consistency in relative price and vast customer

brand loyalty, the threat of substitute products in the home improvement retail

industry is relatively low.

Bargaining Power of Buyers

Lowe’s provides products and services to 13 million customers a week

(www.Lowe’s.com). These 13 million customers are comprised of electricians,

landscapers, painters, plumbers, repair and remolding contractors, commercial

property owners, and “do-it-yourself” homeowners and renters. When

determining the bargaining power of these customers it is important to look at

two factors: price sensitivity and relative bargaining power. Price sensitivity

means how much the buyers in a market are actually willing to try to drive down

the price of products and services. Relative bargaining power means how much

actual power the buyers have over the firm to successfully drive the prices of

products and services according to their price sensitivity.

Price Sensitivity

Buyers’ price sensitivity will be high if products and services in a market

are all the same and if the cost of switching from buying from one firm to

another is low. If buyers are looking for a very specific product or service, that is

important to their cost structure and would cost them a lot to switch from their

original firm to another, they will have low price sensitivity. There are a couple

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of other things that determine the price sensitivity of a customer: the percentage

the product or service comprises the buyer’s cost and how important the quality

of the product or service is to the buyer’s finished product or service. If the

product or service is a small percentage of the buyer’s cost then they might not

bother to look elsewhere for lower prices and buy from the most convenient firm.

Also, if the quality of the buyer’s finished product is not a big factor, then the

buyer won’t worry about bargaining for the price of the products and services.

All of these factors point towards buyers possessing high price sensitivity

in the retail home improvement industry. Only two firms dominate the market:

The Home Depot and Lowe’s. Lowe’s has half the market share that The Home

Depot possesses and is continuously trying to emulate that firm. This means

that as Lowe’s tries to emulate The Home Depot, it emulates its products and

services, and the majority of products and services in the industry are going to

be the same with minor differences resulting in low product differentiation.

Switching costs to buyers in the industry are extremely low. As both dominant

firms compete over price, a buyer’s choice of firm usually boils down to which

firm has the lower prices and is closer or which firm has lower prices and better

customer service in a certain area. In most places except extremely rural areas,

a Lowe’s retail warehouse won’t be far from a Home Depot retail warehouse.

In the home improvement retail industry any certain buyer is looking to

buy products and services that will improve his/her home. On any given project

the products and services purchased at a firm represent 100% of the costs for

home-owners and renters, and all of the costs besides labor for commercial

customers. Also, home-owners and renters, and commercial customers are

usually looking for the highest quality products and services because of the fact

that they are building onto homes. Home-owners and renters don’t want to buy

low quality products for their homes because they have to live with the results of

their projects. Commercial customers want to buy high quality products to make

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sure they have a good reputation with their customers. These high percentages

of costs and the need for high quality goods result in high price sensitivity of

buyers in the market.

Relative Bargaining Power

Although buyers in an industry might have a lot of need to bargain for the

price of their desired products and services, this doesn’t mean they are able to

actually do so. Relative bargaining power is determined not only by the cost to

the customer of not doing business with the firm, but also by the cost to firm of

not doing business with the customer. Customers in the home improvement

retail industry, despite their high price sensitivity, have a low relative bargaining

power. Customers buying a product from any firm in the industry cannot bargain

for its price at the check-out counter. The prices are labeled on the product.

Also, even commercial customers buying at high volumes have to accept any

certain firm’s discount rates. External factors that affect a firm in this industry’s

prices are hurricanes and highs or lows in the housing market, not customers

bargaining for prices in the aisles. The Home Depot and Lowe’s usually offer

differing degrees of products in each category of home improvement. When a

customer thinks that a certain product costs too much, they can buy the same

type of product at a lower quality. The Home Depot and Lowe’s usually have

three or four choices of quality for each type of product and the smaller firms

usually have two choices. So while the cost of buyers switching from one firm to

another in the home improvement retail industry is simply the fuel it takes to

drive a few blocks to the next store, the switching cost is low to the firms as well

because with the high level of competition and low level of product and service

differentiation, customers quickly learn that there really isn’t any point in

spending those extra dollars to drive to the next store.

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Bargaining Power of Suppliers

In the retail home improvement industry the power of suppliers has little

to no effect. Therefore the suppliers have very little power. Home Depot and

Lowe’s actually choose their suppliers for multiple products, as the suppliers can

fill out an application on the website. According to the Lowe’s 10-K, “not one

supplier accounts for more than five percent of total purchases.” This industry

almost has the power over them, as they choose carefully and find which one fits

their needs. Lowe’s makes sure that all the lumber comes from, “well-managed,

non-endangered forests” (www.Lowes.com). There is not much differentiation in

many products in the retail home improvement industry to give the suppliers

much power also. Switching suppliers is not an issue either because one supplier

is not going to be much different than the next. While the costs and quality is

real important for the top companies in this industry, they still have power over

the suppliers because the market is so great in their stores. This makes it hard

for the suppliers to get what they want. While Home Depot and Lowe’s have

multiple suppliers for their stock, Sherwin William’s manufacture most of their

products. Since suppliers are barely needed they have virtually no power either.

The retail home improvement industry has almost the Wal-Mart affect with

picking suppliers for their stores.

Conclusion

The five forces model indicates that the retail home improvement industry

continues to be a highly competitive industry between the two top firms Lowes

Company and Home Depot. As competition increases nationwide between the

industry leaders, smaller more regional firms struggle to survive due to their lack

of capital strength.

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Value Chain Analysis

The Overall Classification of the Industry

As stated above the home improvement industry is one in which there

exists high rivalry among firms, moderate threat of new entrants, low threat of

substitute products, high bargaining power of buyers, and low bargaining power

of suppliers over the firm. In order to be successful in this industry a firm must

be able to offer all forms of home improvement products and services to not only

“do-it-yourself” homeowners and renters, but also to commercial business

customers of all kinds. Niche market firms, while helpful to their specific

customers, don’t stand any chance of catching up with the two major firms (The

Home Depot and Lowe’s) offering one-stop-shops to customers across the entire

market. Cost leadership is also a must to stay competitive and product

differentiation helps to swing loyal customers from one firm to another.

Competitive Strategies

There are several competitive strategies used by firms in the home

improvement industry in order to stay ahead of the competition. The main

strategies include taking advantage of economies of scale and scope, lower input

costs, tight cost control systems, product quality and variety, investments in

brand image, and investments in research and development.

Economies of Scale and Scope

Economies of scale are a big advantage in the home improvement

industry. New entrants to the industry will most likely be opening stores in areas

with one or two stores from leading firms. The average size of those stores is

102,000 square feet with over tens of thousands of items on the shelves.

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Economies of scope are equally important. Besides all of the products for sale,

each store provides many services to homeowners and commercial business

customers. They also contain brand name items that are exclusive, cannot be

found at any other stores, and with which most customers are familiar and have

learned to trust. The size of these stores and their inventories, coupled with

their services and entrenched customer base make it very hard for new entrants

to bare the initial cost of entering the industry and start making profits while

offering competitive prices.

Lower Input Costs

It is crucial to keep input costs low in the home improvement industry. To

stay competitive it helps to order materials such as lumber, steel, paint and

gardening supplies in bulk because suppliers offer discounts on large orders.

This cannot always be the case for every type of item in each store because of

the wide variety needed to stock the shelves, but strategically placing regional

distribution centers can make it possible to evenly distribute items to stores in an

area without driving up transportation costs. It is also important for firms to

have an excellent supplier program so that firm will compete with each to deliver

their goods to your stores. This type of competition can also establish good

relationships with suppliers while always looking for new sources that could

provide the same quality goods at lower prices. Additionally firms can hire

workers at moderate salaries in order to keep costs down while ensuring quality

performance.

Tight Cost Control System

A tight cost control system is needed to ensure not only lower input costs

but also low costs in running every aspect of each store. As mentioned above,

one strategy is to place distribution centers in locations that will minimize

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transportation costs. A good cost control system will ensure that each store

follows the same procedures to minimize costs across the entire firm. This

usually means that each store will be stocked with the same items and offer the

same services. However, leading firms have started a trend called

“cannibalization.” This strategy entails opening two stores fairly close to one

another. Initially the competition of the two stores hurt sales, but profits

increase in the long run because of increased customer service and local market

dominance. It can be cheaper to send most of a certain item to one store in an

area. If the other store does not have what a customer needs the salespeople

can direct them to the store “across town.”

Product Quality and Variety

Product quality and variety is a must in the home improvement industry.

As mentioned above, one strategy of leading firms is to secure certain brand

names and make them exclusively available only at their firm’s stores. As with

most industries, low quality products will not sell well. In order to ensure that a

firms products maintain the industry standard for quality, a firm must watch its

input costs and develop tight cost control systems. The scope of the needs of

homeowners and commercial business customers is so vast that a variety of

products on the shelves is crucial. Different types of services, materials, tools,

and even brand names are needed by different customers for certain tasks they

perform. A few strategies that leading firms utilize in this area are offering

thousands more items that cannot be found in stores on the internet and at in-

store kiosks, installation services, and credit financing. Any firm offering only one

type of service, lumber, tool, or brand name will find it impossible to gain market

share.

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Investment in Brand Image

Since variety is important in the home improvement industry firms are

forced to emphasize brand images to their customers. With so many types of

products and different brand names on the shelves, customers do not usually

pick up products with brand names they do not recognize. Key strategies to stay

competitive with brand recognition involve in store do it yourself workshops,

advertising through TV, radio, newspapers, specialty cable channels such as

Home and Garden Television, and ensuring that the exact target demographic is

reached through each type of media. Multicultural marketing plays a key role

with brand recognition as well because of the growing number of African-

American and Hispanic customers in the industry (www.Lowes.com).

Lowe’s: Cost Leadership, Differentiation, or Both?

Lowe’s would be considered in the cost leadership strategy for their

competitive strategy. Their client base has a large population as they provide

products at low prices that most people need. The focus of Lowe’s is, “excellent

customer service, Everyday Low Prices, and innovative operational,

merchandising, marketing and distribution strategies” (www.Lowes.com). This

focus shows that Lowe’s is not relying on differentiation of products to get

people in the door, but low prices and efficient strategies.

By expanding out to Canada this year Lowe’s is taking advantage of global

sourcing opportunities. Home Depot already has stores in Canada that are doing

well, so Lowe’s is expanding to grab some of the Canadian market. Lowe’s does

not have to produce or design any products, and therefore has no research and

development cost either. Lowe’s advertising cost was $873 million, which is not

much of an investment for a large company. Lowe’s promises that if there is a

everyday price at a competitor that is lower than theirs then they will beat it by

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10% according to the 10-K. As mentioned above in the bargaining power of

suppliers Lowe’s has suppliers fill out applications to be their supplier, this helps

Lowe’s pick the best price at all of their stores. To keep the stores stocked

efficiently Lowe’s has eleven regional distribution centers that are highly

automated. “This provides savings for our customers and both brand building

and gross margin improvement opportunities for Lowe’s.” (www.Lowes.com). In

conclusion, Lowe’s is very much based on a cost leadership strategy to keep

expanding in the retail home improvement industry.

Firm Competitive Advantage Analysis

Over the last five years, Lowe’s has experienced an above average growth

rate compared to the existing home improvement retailers. This has much to do

with maintaining the competitive strategy of cost leadership in the home

improvement retail industry. Although there are many ways to create a

competitive advantage in this market, Lowe’s decides to use economies of scale

and scope, lower input costs, and a tight cost control system to create value for

its customers and investors.

Economies of Scale and Scope

Economies of scale, as stated above, provides large companies with a

significant advantage in the home improvement retail industry. Lowe’s is a

Fortune 50 company and the second largest retail corporation in this division

following Home Depot. This enables them to purchase large quantities of goods

which give them a high bargaining power in the industry. At the end of the fiscal

2006 period Lowe’s had 1,385 stores in forty nine states

(www.Finance.yahoo.com). With the expansion of Lowe’s out of the United

States and into Canada, their bargaining power and cost leadership will grow to

new levels. Furthermore, Lowe’s has invested equally in the economies of scope

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by offering exclusive brands. Kobalt, Perfect Flame, and Harbor Breeze are only

a few of the brands found only at Lowe’s. Providing buyers with exclusive

brands ensures that they will keep coming back to Lowe’s stores if they like the

product. Increases in Lowe’s economy of scale and scope offer a great balance

to consistently compete as one of the industry’s top two firms.

Lower Input Costs

Lower input costs are very important when it comes to being the low cost

provider in an industry. Lowe’s has implemented numerous strategies in the last

few years to cut out trying expenses that are an annoyance to normal

operations. A major development in Lowe’s cutting of input costs is keeping up

with new technology by continuously updating information systems. For

example, Lowe’s uses a point-of-sale system and an electronic bar code scanning

system in each of their stores. These systems are almost crucial in a large retail

firm because they offer perpetual real time inventory information to managers

and suppliers. This helps in driving unnecessary expenses down, and Lowe’s

employees may spend more quality time improving customer relations and

maintaining a better store appearance.

Another expense that Lowe’s has continued to decrease is the cost of

product sourcing. They use around 7,000 vendors worldwide to maintain a

variety of products and competition. Management believes this improves supplier

competition, and drives costs lower for the firm. They also insist on cutting out

the middle man by purchasing directly from foreign manufacturers when

appropriate. This helps cut the cost for Lowe’s and its customers on a consistent

basis. Using these techniques to lower input costs helps Lowe’s create a cost

advantage compared to its relative competitors (www.yahoo.finance.com).

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Tight Cost Control System

Lowe’s companies have made additional changes to their inventory

strategies to keep a tight cost control system in place. Lowe’s has eleven

regional distribution centers nationwide and plans on adding three more in the

fiscal 2007 year (www.finance.yahoo.com). The addition of three regional

distribution centers (RDCs) will facilitate faster maintenance of in-stock levels for

the Lowe’s companies in those regions. The significance of the additional RDCs

will be seen next year. However, Lowe’s can speculate that transportation and

shipping costs will be reduced. Increasing accessibility to inventory and lowering

transportation costs can be recognized with strategically placed distribution

centers.

In addition, Lowe’s has begun to implement self checkout machines at a

number of their stores. Cutting down on employee labor costs by having an

automated checkout machine helps Lowe’s reduce small percentage of their

labor costs for the year. In the future Lowe’s expects to implement self checkout

machines at all their stores further decreasing labor costs to the company.

Gross Profit Margin

Year 2002 2003 2004 2005 2006

Lowe's 0.3044 0.3115 0.3373 0.342 0.3452

(www.finance.yahoo.com)

In accordance with the tightening of cost control, the gross profit margin

for Lowe’s has increased over the last few years. Gross profit margin reflects the

extent to which revenues exceed direct costs associated with sales. This shows

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that Lowe’s has been making improvements on cost controls regularly and

efficiently over the past five years. The trend is likely to increase further in the

next few years as Lowe’s implements more self checkout machines and adds

additional distribution centers.

Key Accounting Policies

In the retail home improvement industry there exists moderate threat of

new entrants, low threat of substitute products, high rivalry among firms, low

bargaining power of buyers, and low bargaining power of suppliers over the firm.

In order to be successful a firm must emphasize cost leadership while

maintaining a level of differentiation or the illusion of differentiation in products

and services to curve the low switching cost of consumers. In the first draft it

was established that Lowe’s, in accordance with the nature of the industry, has

become the second largest home improvement firm by concentrating on staying

competitive with economies of scale and scope, lower input costs, and tight cost

control systems. It is important for firms to match key accounting policies with

key success factors in order to produce accurate and transparent numbers which

help emphasize their strengths to investors.

Net Sales Growth and Expansion

Home improvement retail firms must be competitive with costs because of

the high level of competition that exists in the industry. As mentioned above,

firms in this industry can use economies of scale to help achieve the goal of

reducing costs while maintaining the quality of the offered products. In order to

take advantage of economies of scale a firm must make larger purchases and

this is made possible through continuous growth and expansion. Over the past

five years Lowe’s reported an average net sales growth of 16.31%. Lowe’s had

a steady 18% net sales increase until 2007 in which sales only increased by

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8.5%. An 18% net sales increase is excellent and even an 8.5% growth rate is a

healthy amount to take advantage of economies of scale by increasing purchase

volumes each year. Lowe’s net sales growth should return to its higher historical

rate after 2009 when the housing market slump is forecasted to come to an end.

Net sales growth is vital to taking advantage of economies of scale. Of

course, nets sales growth will reach a plateau if it isn’t accompanied with

expansion. Lowe’s is doing a good job of expanding its amount of stores at a

rate that will sustain its net sales growth. In Lowe’s 2006 10-K, it reports that it

opens over 100 new stores each year with 155 new stores opened in 2006 and a

projected 150 to 160 new stores to open in the 2007 fiscal year. Lowe’s ended

2006 with 1,385 stores and reported in its September 5, 2007, quarterly report

that as of August 3, 2007, it had 1,424 stores. Also in the 2006 10-K, Lowe’s

reported that it believes it can expand its number of stores in North America to

2,000 and that its real estate committee had already approved 400 new store

locations. In North America alone, this means that Lowe’s can continue its

expansion rate of over 100 stores a year for the next five to six years leaving

plenty of room for its net sales growth to continue increasing at a healthy rate.

Expansion is a key accounting policy for Lowe’s because it needs to

emphasize to its investors how well it is building new stores to accompany its net

sales growth. Lowe’s does a good job of reporting its net sales growth and store

expansions and it also does a good job of making these areas transparent in its

financial statements. There is a line item included on Lowe’s income statements

that reports the store opening costs for each year. Lowe’s explains a little bit

about the opening expenses in the notes section as well towards the end of the

reports. When a firm is growing it can be difficult to determine from without

whether that growth is from sales or expansion. Lowe’s disregards the ease in

which competitors could follow and be proactive against its expansion plans and

opts to report transparent figures to its investors.

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Operating and Capital Leases

Another key accounting policy in the retail home improvement industry is

how a firm discloses its operating and capital leases. It is important when

analyzing a firm to keep an eye on its leases. Operating leases do not show up

on the balance sheet. This will make it seem that the firm has fewer liabilities

and less future obligations than it realistically possesses. If a firm does not

disclose enough information, it can be extremely difficult to determine how to

undo the distortions its operating leases have caused. Firms may be tempted to

allow these distortions to occur without disclosing information on their operating

leases because it will appear that they have lower costs than other firms utilizing

capital leases. Firms who use capital leases appear to have more costs because

they report the leases on their balance sheet. This is because capital leases

have the characteristics of assets.

Lowe’s doesn’t seem to be trying to hide its leases. In its note sections

toward the end of its 10-Ks it discusses its operating and capital leases in detail.

It shows a graph that discloses how much it has spent in rent expenses over the

last three years, shows the details of how much payment on both types of leases

will be over the next five years, and then lists how much the total payment will

be over the remaining years of the leases. The section on leases also discloses

that Lowe’s usually signs 20 year leases informing the reader of their long-term

nature. On the balance sheet, Lowe’s includes references to the note that

explains operating and capital leases on the line item labeled, “long-term debt,

excluding current maturities.” This shows that Lowe’s is not trying to hide any

information regarding its leases and regards this area as a key accounting policy.

We do not believe that Lowe’s obligations in operating and capital leases are

substantial. The average number of Lowe’s obligations over the past three years

and the next five years is $384 million. This was somewhat significant in 2003

when it was about 5% of total liabilities, but today it is about 3%, and will be

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about 1% in 2017. At the same time Lowe’s fully discloses its lease obligation

amounts in order to make it easy to undo any distortions that might be deemed

significant. As an investor in the retail home improvement industry it is

important to be informed on a firms operating and capital leases. When a firm is

growing its obligations with leases can also grow and make a firm increasingly

look like it is reducing costs while expanding. With a 3% to 1% level of

difference we do not believe that the operating leases will significantly distort the

financial reports.

Conclusion It is important to pay close attention to any firms accounting policies in any

industry. It is especially important to look at key accounting policies that are

linked to key success factors. Firms know how they need to stay competitive in

their respective industries and some may decide to distort their financial reports

in order to make them seem better than the competition. If a firm does not

discuss in detail how it has determined the numbers on its financial statements it

can be hard to determine whether if that firm is disclosing numbers that are

consistent with reality. If there are sufficient explanations included in the

reports, however, then it is easier to identify problem areas and to affirm the

reported numbers. A good firm should report transparent reports with key

accounting policies that support its key success factors. Lowe’s supports its key

success factors of economies of scale and scope, lower input costs, and tight

cost control systems with its key accounting policies in its reports. With a little

knowledge of financial reports, the transparency and high level of disclosure can

be noticed easily in Lowe’s 10-Ks.

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Potential Accounting Flexibility

General Accepted Accounting Principles (GAAP) are guidelines that publicly

traded companies follow in recording and disclosing their public information.

Although GAAP tries to keep things similar on the financial statements of

companies there are many flexible parts to the principles. This flexibility in GAAP

is used by companies to better value their company or in some cases make their

company look more valuable for investors. “All firms have to make choices with

respect to depreciation policy, inventory accounting policy, and policies regarding

the estimation of pension and other post-employment benefits (Palepu and

Healy).” By analyzing the flexibility of the key accounting policies of Lowe’s and

the retail home industry we can see how these companies use these flexibilities

to show how much the wealth of the firms are.

Recording leases is a one way of flexibility in GAAP for recording

purposes. Companies record leases as either operating or capital leases in their

reports. Operating leases are the most commonly reported in the retail home

industry as this reduces assets and liabilities. Since operating leases are basically

just paying rent and the company does not own the property it is not placed on

the balance sheet. When reducing the liabilities this increases the retained

earnings which in turn, make the firm look more valuable to investors. While

Lowe’s and its competitors do have capital leases listed, they are considerably

lower than the operating leases. Capital leases are recorded on the balance

sheet, therefore increasing the assets and liabilities, and reducing the retained

earnings.

Deferred revenue is also a flexible part on the financial statements of

Lowe’s. The deferred revenues are shown as increased liabilities on the balance

sheet. Lowe’s deferred revenue includes installation work and gift cards. The

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gift cards are recognized when they are redeemed at one of the retail stores.

The gift cards that are purchased have no expiration dates on them and can be

redeemed by the customers at any time. Installation work revenue is not

counted until the work is done at the location. Home Depot’s services and gift

cards act the same way. Tractor Supply Company also has a merchandise return

card for some return transactions. These cards are also not recognized until

they are redeemed, or expire after a year. Tractor Supply also, according to

their 10-K they recognize the gift card when there is a remote chance that the

customer is going to redeem it. According to their 10-K they believe that the

redemption of the gift card is remote.

Another flexible part on the financial statements according to GAAP is how

the companies record the pension plans. The companies have to record how

much they believe will be paid in the future in the benefit plans they give out to

their employees. The most common benefit plan for employees is the 401-k,

which takes out a certain amount of money from their salary and it is put in a

mutual fund of the employee’s choice. Since the discount rate value is uncertain

in the future, these numbers are “flexible” on the balance sheet. The lower the

rate the higher the firm’s asset value will be because they will have a lower

expense to pay the employees.

In conclusion, while GAAP is very strict in most aspects while recording

companies’ figures, there are certain parts that can be flexible. Since these parts

are so flexible the managers can use it by improving the way their firm looks on

paper. While some may argue that the financial statements are incorrect but the

flexible nature of GAAP keeps the statements informative for the investors on

“understanding the firm’s economics” (Palepu and Healy).

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Accounting Strategy

The Lowe’s Company Inc. has been a publicly traded company for more

than 20 years. As a publicly traded corporation they follow all the key accounting

principles generally accepted in the United States. This also mean The Lowe’s

Company follows all of the GAAP guidelines provided for their accounting

disclosure. Currently The Lowe’s Company uses the Deloitte and Touche

Accounting firm to audit all their financial reports.

Complying with GAAP begins with a company’s internal accounting

policies. With this in mind Lowe’s views their internal controls as effective.

Deloitte and Touche viewed Lowe’s internal control as effective and “is fairly

stated, in all material respects, based on the criteria established in Internal

Control—Integrated Framework” (Lowe’s 10-k). However, there were concerns

over the limitations and possibilities of improper management and misstatements

due to error and possible fraud. Deloitte and Touche only audits the fact that

financial statements are in accordance with GAAP and does not guarantee that

the numbers are completely accurate

Overall, Lowe’s Company Inc. has a moderate to high level of disclosure

within their financial reports. Lowe’s discloses information about current litigation

issues they are facing. However, Lowe’s does state that these litigation issues

are immaterial in regards to their earnings (Lowe’s 10-k). Another major key

accounting policy (KAP) they mention is their partial operating and partial capital

lease expenses. It is important to note that Lowe’s Company Inc. has 8.5 times

more money is operating leases over capital leases. Other accounting policies

Lowe’s maintains is the disclosure of merchandise inventory which has increased

steadily of the last five years by approximately 80%. Lowe’s also discloses to its

shareholders vendor expenses, revenue recognitions, and self insurance

liabilities. Over the past few years Lowe’s has recorded a significant increase in

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self insurance liabilities due to their overall growth of stores, employees, and

company vehicles. By reading these disclosures we find that Lowe’s gives a

moderate to high disclosure to its investors.

After evaluating The Lowe’s Company’s accounting strategy we feel they

have semi-aggressive approach to their financial statement reporting. The

excessive use of operating leases over capital leases lowers the expenses Lowe’s

accrues annually. This would imply a higher net income within their financial

reports. Even though this strategy causes a higher net income neither the

income statement nor balance sheet are affected. This is possible because

Lowe’s specifically explain the effects of the lease numbers in their 10k notes and

shows what little effect the lease numbers have on their bottom line. The fact

that Lowe’s views their litigations issues as immaterial also implies an aggressive

approach to undermining their expenses. However, it is impossible to determine

the actual cost of these litigations so they may likely be irrelevant to their

shareholders.

Quality of Disclosure

The amount of information a company discloses to investors is dictated by

the Securities and Exchange Commission. Although the SEC gives companies

guidelines for disclosure of financial data, the companies must take on the task

of informing investors to the best of their ability. It is crucial for financial data to

be easy to read and understandable because private investors do not always

know the inner workings of a firm in which they intend to invest.

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Qualitative Analysis of Disclosure

Over the past five years the home improvement retail industry has grown

increasingly from year to year. This result does not only come from increased

sales by firms in the business, but also the growing trend of increased investing

in these firms as well. This is achieved in some part due to the high quality of

disclosure of accounting policies that attempt to convince investors the industry

is in good shape. Notes in the discussion of consolidated financial statements

shed light on key concepts not covered directly in the statement. The extent to

which the company goes into detail in these notes should be the best the

company can offer without giving away competitive advantages to competitors.

The company historically uses very conservative accounting practices in their

financial statements. Conservatism provides justification for understating

benefits and overstating obligations and risk under uncertainty.

Accounts Receivable

All companies that are publicly traded must submit filings to the SEC every

year. The level of disclosure is monitored but is given leeway for some business

entities. However, Lowe’s has an overall high level of disclosure and this is

shown in their annual 10-K documents. For example, the accounts receivable of

Lowe’s has been relatively insignificant on the balance sheet because of an

agreement they entered into with General Electric in 2004. Most of Lowe’s

receivables exist due to their relationship with commercial business customers.

In this note on the 10-K annual report they explain the process of selling these

accounts receivable to General Electric at face value. GE then services these

accounts for Lowe’s and records any gains or losses at fair value. This however

does come at some expense to Lowe’s due to the servicing costs associated with

the receivable transfers to GE.

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(in millions) 2004 2005 2006

Account Receivables sold to General Electric 1200 1700 1800

Losses associtated with sale -34 -41 -35

The losses recorded by Lowe’s are expensed in the general, selling, and

administrative expenses on the balance sheet for these years. If Lowe’s had

chosen not to show this on the 10-K the company may look unattractive to

investors. The company also showed the losses associated with the sale. By

disclosing these numbers Lowe’s might be putting the company in a bad light but

this does improve their level of disclosure. This creates a clearer forecast of

future cash flows by eliminating any bad debt expense associated with accounts

receivable that would otherwise be on the income statement. Any other account

receivables not bought by General Electric are reported as insignificant and are

not reported on the financial statements.

Market Risk

Lowe’s also puts time and effort into informing their investors about

market risk. Based on data given in the 10-K the primary market risk appears to

be the fluctuation of interest rates on long-term debt. The long-term debt is by

far their greatest liability to the company and has increased over time. In order

to off-set this risk, Lowe’s uses a variety of fixed interest rates and variable rates

associated with their lines of credit, to satisfy long-term debt each year.

Although Lowe’s changes the interest rates they use, no evidence of hedging is

found anywhere in their company.

In addition, Lowe’s discloses other forms of market risk arising through

changing market conditions. Adverse changes in the economic factors affecting

real estate industry affect the home improvement retail industry as well.

Housing turnover, slowing home price appreciation, and rising mortgage rates all

cause changes in the home improvement industry. When the real estate

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industry slows down or has poor market conditions this directly affects the

choices people make for improving their homes. When housing turnover is high

consumers will readily make improvements in an attempt to sell their house as

soon as possible. The opposite is true for rising mortgage rates and slow home

price appreciation because some consumers are not as willing to improve

something that is associated with a slow market. Eventually sales will decrease

in home improvement retail if market risks remain high. Lowe’s disclosure of the

market risk associated with their products gives investors crucial knowledge for

future changing market conditions.

Overall, the financial statements along with notes that go along with each

entity are very informative. The company explains each point in depth in the

notes but it would be more useful to show some things they did not on the

balance sheet. The balance sheets of Home Depot, Sherwin Williams, and

Tractor Supply Company go more into depth in their analysis of property, plant,

and equipment. Lowe’s only shows property less depreciation while the other

three competitors breakdown this into property, plant, any equipment, and finally

accumulated depreciation. Lowe’s does disclose these numbers in their notes

just not directly on the consolidated balance sheet. As years progress Lowe’s

annual reports and financial statements have become more in depth. Stricter

guidelines by the SEC and new accounting policies have led to more informed

investors. Lowe’s quality of disclosure is high although their strongest

competitor, Home Depot, has a high level of disclosure as well. The quality of

disclosure is different from company to company and from risk to risk. Lowe’s,

like other companies, evaluates what it can and can’t disclose to the public while

keeping the confidence of investors in mind.

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Quantitative Analysis of Disclosure

Evaluating a firm can be a great task considering all financial statements

from every year should be analyzed to tell the story of that firm. This section will

help in uncovering the truth about financial data reported in the home

improvement retail industry.

Using diagnostic ratios, we are able to manipulate important numbers

from financial statements to tell us how well Lowe’s compares relative to the

industry. To do this, we will separate sales manipulation ratios and expense

manipulation ratios over a five year span for each firm in the home improvement

industry. Using a five year analysis gives us a much better look at what each firm

is trying to explain in their financial statements then simply looking one year in

the past. This will help in uncovering potential outliers and deviants from the

industry that may prove to be using accounting strategies to boost or reduce

financial values. This is not always a bad or purposeful move that firm’s make,

but we must be able to uncover the truth about these companies’ disclosure

techniques. We will attempt to do this using these manipulation diagnostic ratios

below.

Sales Manipulation Diagnostics

Using sales diagnostic ratios allows us to understand if and how certain

other variables can explain a sales increase or decrease throughout a period of

time. They help analysts to attempt to find discrepancies in reporting from year

to year against the rest of the industry. This section will examine such ratios as:

Net Sales/Cash from sales, Net Sales/Net Accounts Receivable, Net

Sales/Unearned Revenues, Net Sales/Warranty Liabilities, and Net

Sales/Inventory. These ratios and graphs will allow us to draw conclusions about

how these variables have affected the reported Net Sales in the firm’s financial

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statements, and they will let us evaluate the believability of the reported

financials.

Net Sales/Cash from Sales

2002 2003 2004 2005 2006

Lowe's 1.00 1.00 1.00 1.00 1.00

Home Depot 1.00 1.00 1.01 1.01 1.01

Sherwin-Williams 0.99 1.01 1.03 1.01 1.01

Tractor Suppy 1.00 1.00 1.00 1.00 1.00

Net Sales/Cash From Sales

0.9

0.92

0.94

0.96

0.98

1

1.02

1.04

1.06

1.08

1.1

2002 2003 2004 2005 2006

Year

Lowe'sHome DepotSherwin WilliamsTractor Supply Co.

This ratio explains the difference of sales to the actual cash received from

these sales. The cash from sales amount is explained by taking the difference of

accounts receivable from the previous year and subtracting (or adding) this

number to net sales in the denominator. We can then divide this number by

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actual Net Sales from that year to get to the ratio that tells us how much actual

cash we received compared to our operating sales year to year. The ideal

situation for any firm would be a ratio right around 1:1. Although, many home

improvement firms offer store credit cards that could increase this ratio because

it would steadily increase their accounts receivable from year to year. In

contrast, some home improvement firms extract their accounts receivable to an

alternate financial firm. This would manipulate this ratio to a value less than 1,

and eventually be equal to 1 after all receivables have been transferred.

While attempting to identify manipulations in the numbers, a noticeable

increase in the ratio for Sherwin-Williams can be seen in 2004. This was due to

a large increase in the accounts receivable for the firm. Although this is still an

asset, a large increase in accounts receivable leads to an increase in the

allowance for bad debt. This could be bad for the firm if bad debt expense

continues to increase. Also, a noticeable difference is the mainstream lines of

Lowe’s and Tractor Supply Company. As mentioned earlier, Lowe’s sold off their

accounts receivable to GM Financial in 2004. This explains their constant 1:1

ratio with a slight dip involving getting rid of the final amounts of receivables in

2004. This type of manipulation in the ratio is shared by Tractor Supply Company

who did the same thing in 2002 (extracting accounts receivables to CitiGroup

Financial). Their ratio dips in 02’ and 03’ result from releasing their small

remaining receivables. Overall, there were no significant manipulations designed

to improve the numbers of the companies.

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Net Sales/Net Accounts Receivable

2002 2003 2004 2005 2006

Lowe's 151.81 211.29 N/A N/A N/A

Home Depot 54.33 59.08 48.76 34.02 28.18

Sherwin-Williams 10.5 9.94 8.44 8.89 9.03

Tractor Suppy N/A N/A N/A N/A N/A

The ratios of net sales to net accounts receivable are farily

straightforward. Consistency is the main focus in examining this graph because

changes indicate manipulations in the numbers. Instead of using cash from

sales, we now look straight at accounts receivable in relation to net sales. Two

outliers were eliminated from the graph, one of which was the ratio for Lowe’s in

2004 and the other for Tractor Supply in 2002. These outliers were eliminated

because they did not show true ratios that can be examined. In these years

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both companies sold off their accounts receivables as mentioned earlier. For the

ratios shown in this graph Lowe’s looks as if they were beginning to understate

their accounts recievable from 2002-2003. This may have been due to their

knowledge that they were going to be selling off their receivables in the coming

years. On the other hand, Home Depot and Sherwin Williams have a steady ratio

in respect to sales and accounts receivable. Their ratios are consistent although

Home Depot’s is steadily declining. While their accounts receivables account for

more and more of their net sales, this may create a problem for the company.

Sherwin-Williams manipulation from the net sales/cash from sales in 2004 can be

seen here as well. Their ratio dips slightly as they recognized more receivables

in that year.

Net Sales/Unearned Revenue

2002 2003 2004 2005 2006

Lowe's N/A N/A 137.6 114.7 128.92

Home Depot 58.36 50.59 47.28 46.39 55.59

Sherwin-Williams N/A N/A N/A N/A N/A

Tractor Suppy N/A N/A N/A N/A N/A

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When analyzing the ratio of net sales to unearned revenue analysts first

must know what they are looking for. Unearned Revenue is a current liability

found on the balance sheet. However, the companies in the home improvement

industry do not recognize this liability directly. Instead, unearned revenue is

accounted for in the deferred revenue entry on the balance sheet. This made

analyzing this ratio difficult because many liabilities are thrown into the deferred

revenue account.

Furthermore, this ratio is important because it shows the how sales

recognition affects unearned revenue. If a company wanted to boost their

earnings, they simply recognize revenue that has not been incurred. This type of

accounting policy would drastically increase the ratio because sales would

increase while the unearned revenue account decreases. Lowe’s and The Home

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Depot were the only companies that had any statistical information involving

unearned revenue. Lowe’s sudden rise from 2003 to 2004 is explained by the

insignificance of the values in the previous years. Before 2004 Lowe’s did not

disclose their any unearned revenue on the financial statements. Sherwin-

Williams and Tractor Supply Company made notes to their financial statements

explaining their poor disclosure. Tractor Supply Company does not offer store

credit or gift cards as some home improvement retailers do. Instead they have a

customer layaway program where all they require is a deposit. Finally, Sherwin-

Williams believed their unearned revenue liability was insignificant and did not

record it on the balance sheet.

Net Sales/Warranty Liabilities

2002 2003 2004 2005 2006

Lowe's N/A N/A 424 209.92 148.97

Home Depot N/A N/A N/A N/A N/A

Sherwin-Williams 334.29 326.65 337.82 312.6 309.59

Tractor Suppy N/A N/A N/A N/A N/A

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Only Lowe’s and Sherwin William’s have a net sales/warranty liabilities

ratio. Sherwin William’s ratio is very consistent, but Lowe’s didn’t begin doing

extended warranties until 2003. According to Lowe’s 10-K they use straight line

depreciation to depreciate their extended warranties each year. Since Lowe’s

had just begun to offer warranties in 2003, they had a very low value for

warranties in that year. This made their ratio extremely high and thus was

eliminated as an outlier. Sherwin Williams bases their warranties on estimates

by the managers and periodic checkups that are accrued into the figure making

their ratio constant. Since Sherwin William’s rarely comes out with new products

the manager’s estimates are usually relatively close, making the ratios accurate.

This type of accuracy results in no manipulations by the Sherwin-Williams for this

ratio. Home Depot and Tractor Supply Co. offer no warranties for their products

making both of their ratios zero.

Net Sales/Inventory

2002 2003 2004 2005 2006

Lowe's 6.58 6.73 6.1 6.52 6.57

Home Depot 6.99 7.14 7.25 7.15 7.08

Sherwin-Williams 8.3 8.47 7.91 8.89 9.46

Tractor Suppy 4.18 4.54 4.51 4.49 3.99

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The Net Sales/Inventory ratio shows how much sales are supported by

the amount of inventory in the company year to year. Every one of the four

competitors in the retail home improvement industry has a fairly steady ratio.

This means the sales they are accumulating increase and decrease consistently

with the inventory that they have on hand. Although, Sherwin Williams’ ratio has

increased in the last few years, meaning that the change in inventory did not

support the change in sales growth. This, in fact, is correct because in 2005 and

2006 inventories only increased by 4.6% and 2.1%; while sales grew at 17.6%

in 2005 and 8.6% in 2006. This happened because Sherwin Williams recorded a

reserve for obsolescence of around $75 million in both 2005 and 2006 to reduce

inventories to their net realizable value (Sherwin Williams 10K). As an industry,

the results for this ratio do not indicate that any company has overstated sales in

respect to inventory.

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Expense Manipulation Diagnostics

The expense diagnostic ratios are similar to the sales diagnostic ratios in that they

are attempting to discover any reporting discrepancies in the financial statements. This

section will examine such ratios as: Declining Asset Turnover, Changes in CFFO/OI,

Changes in CFFO/NOA, Total Accruals/Change in Sales, and Other Employment

Expenses/SG&A. These ratios and graphs will help in drawing conclusions about the

relevance of these numbers on the firm’s financial statements.

Asset Turnover (Sales/Assets)

2002 2003 2004 2005 2006

Lowe's 1.62 1.64 1.72 1.76 1.69

Home Depot 1.94 1.88 1.88 1.84 1.74

Sherwin-Williams 1.51 1.47 1.43 1.65 1.56

Tractor Supply 2.64 2.74 2.56 2.54 2.35

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The asset turnover ratio helps to determine how well a company uses its assets to

provide sales. Obviously, a high ratio is ideal because this would mean the company

would have high sales when using a minimal amount of their total assets. Supprisingly

Tractor Supply Company has the highest ratio in the market. To explain this one must

know the market in which they operate. Tractor Supply has a small number of assets

and their product is much more expensive. They also have little inventory because most

of their product is expensive.

One thing companies must be protective of is a declining asset turnover. This

means the company is growing their assets at a faster rate than their sales. Home Depot

and Tractor Supply must be cautious not to increase their assets so much that they do

not produce enough revenue for the company to run smoothly. As seen in the graph

Lowe’s is slowly catching up to their main competitor Home Depot. This can be

explained by the rapid growth of Lowe’s into areas where Home Depot has claimed most

of the market share. This increases the sales and consequently the asset turnover ratio

of the company. In addition, capital leases and operating leases effect the asset

turnover for these companies. As mentioned earlier the capital leases for Lowe’s are

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immaterial and do not affect the total assets as a whole. However, if all operating leases

were capital leases this ratio would decrease because of the increase in assets. No other

distortions or manipulations of the numbers can be found for this ratio in the home

improvement retail industry.

Change in Cash Flow from Operations/Change in Operating Income

2002 2003 2004 2005 2006

Lowe's 1.6 0 0.07 0.8 1.33

Home Depot -1.28 1.71 0.33 -0.29 N/A

Sherwin-Williams 0.69 0.04 -0.24 2.02 0.51

Tractor Supply 0.8 0.55 2.16 0.63 -1

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Cash Flow from Operations/Operating Income

2002 2003 2004 2005 2006

Lowe's 1.49 1.17 0.83 0.83 0.87

Home Depot 0.82 0.96 0.84 0.71 0.79

Sherwin-Williams 1.01 0.97 0.86 0.98 0.93

Tractor Supply 0.71 0.65 0.76 0.73 0.59

The change in cash flows from operating activities compared to the change in

operating income provides a ratio worth analyzing. Operating income is also known as

earnings before interest and taxes, or EBIT, and can be found on the income statement.

CFFO, or Cash flows from operating activities, is a measure of the cash generated by the

operating activities of the company. If this ratio is declining the result is that income is

not supported by cash. Therefore, from 2002 through 2004 Lowe’s net income was not

supported by cash. This shows that some expenses that are incurred by Lowe’s are not

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being recognized on the income statements. In 2003 there is a significant manipulation

of the numbers so much that it created a ratio of approximately 0 for the change in

CFFO/change in OI. This was because their CFFO changed by only a few thousand

dollars while their operating income changed by several million. Again this is proof that

Lowe’s did not recognize some of their expenses in this year in attempt to boost

earnings.

Changes in CFFO/ Changes in Net Operating Assets

2002 2003 2004 2005 2006Lowe's 0.97 0 0.02 0.31 0.25Home Depot -0.33 0.61 0.13 -0.19 0.69Sherwin-Williams 0.78 -0.07 -0.2 N/A 1.19Tractor Supply 0.51 0.63 0.21 0.49 -0.28

A company’s ratio between the changes in cash flows from operating activities

and the changes in net operating assets relates cash flows with fixed assets such as

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property, plant, and equipment. The greater this ratio, the better the firm utilizes those

fixed assets. The home improvement retail industry proves to keep a consistently low

average with respect to this ratio, but larger firms such as Lowe’s, Home Depot and

Sherwin Williams have utilized their fixed assets to produce positive cash flows as of last

year. Although the graph seems to be all over the board, there is no sign of any

accounting distortions for any firm in this industry. This has been a consistent average

ratio of right around 0.3 in the last five years.

Total Accruals/Sales

2002 2003 2004 2005 2006

Lowe's 0.10 0.10 0.09 0.08 0.09

Home Depot 0.11 0.11 0.12 0.15 0.19

Sherwin-Williams 0.32 0.33 0.39 0.35 0.34Tractor Supply 0.10 0.09 0.09 0.10 0.11

This ratio helps look at the financial stability of a company at one point in time.

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Accrual accounting helps firms account for expenses and revenue that have not been

accounted for. An investor might perceive a high ratio as a bad thing because it could

mean they do a lot of business on credit. Overall, the industry seems very stable within

this ratio, and Lowe’s has stayed right around the industry average for the last 5 years.

Sherwin-Williams would be considered an outlier because it is so far above the industry

average. There is no sign of any accounting distortions within the industry due to the

consistency and relative industry average.

Other Employee Expenses/S,G,&A

2002 2003 2004 2005 2006Lowe's 0.025 0.015 0.009 0.015 0.004Home Depot 0.009 0.008 0.007 0.008 0.009Sherwin-Williams 0.007 0.008 0.008 0.007 0.006Tractor Supply 0.01 0.005 0.004 0.004 0.004

This ratio relates other employee expenses with selling, general, and

administrative expenses. Selling, general, and administrative expenses are operating

expenses incurred by companies each year. This ratio was not relevant in attempting to

detect any accounting distortions due to the insignificant low values for the home

improvement retail industry.

Potential Red Flags

A red flag is anything that points to questionable accounting practices that

make the firm look better by boosting profits or increasing performance.

Shareholders should always be aware of these types of practices because they

can lead to false reporting which could overvalue the company and its stock

prices. When analyzing a firm’s financial reports red flags usually show up as

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discrepancies found while performing a ratio analysis. If historical ratios begin to

change dramatically over a short period of time then distortions might be

present. We examined the past five years of financial reports to determine if

there exist any such distortions. After examining Lowe’s past five annual reports

we determined that there were no potential red flags that would mislead

investors. Since 2003, Lowe’s annual reports have actually improved consistently

in their amount and quality of disclosure of all financial information. For

example, as stated above, Lowe’s discloses a lot of information about its

operating and capital leases, which can easily be used to distort financial data.

In fact, Lowe’s has been disclosing this information as far back as 1995 far

beyond the reach of our ratio analysis. Lowe’s also discloses the present value

of its minimum lease payment. This makes it possible to determine any

distortions without guessing. Overall, the accounting principles used in preparing

the financial reports for Lowe’s Company Inc. are transparent and accurate. As

you can see in the table below Lowe’s spreads out their payments over several

years, which in turn causes a very minimal expense on the yearly balance sheet

and income statement.

Payments Due by Period Contractual Obligations Less than 1-3 4-5 (In millions) Total 1 year years years Long-term debt (principal and interest amounts, excluding discount) $ 7,865 $ 281 $ 438 $ 870 Capital lease obligations 1 644 62 124 123 Operating leases 1 5,527 323 645 642 Purchase obligations 2 2,307 1,079 834 382 Total contractual obligations $ 16,343 $ 1,745 $ 2,041 $ 2,017 Amount of Commitment Expiration by Period Commercial Commitments Less than 1-3 (In millions) Total 1 year years Letters of credit 3 $ 346 $ 344 $ 2 $ -$ -

Of course, when analyzing a firm solely using financial reports, it is always

important not to assume that all conclusions are 100% correct.

Undo Accounting Distortions

When analyzing a firm, one must be able to take a fair look at all the

financial statements and give an unbiased assessment of where the company is

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headed in the future. These reports can be distorted by aggressive accounting

policies or human error. Lowe’s seems to be in good standing when reporting

their financial statements. This means that we do not believe that there are any

distortions on the reports that actually need to be fixed. As stated above, Lowe’s

reports financial data that is transparent and without distortions. This data is

transparent because Lowe’s goes into detail and explain areas of its balance

sheets, income statements, and statements of cash flows. These explanations

uncovered areas that could be successfully distorted if no information was

disclosed and curved any suspicion we had that these distortions existed.

Operating leases could have distorted Lowe’s numbers, but with the explanations

provided we found these leases to be insignificant. As stated above, Lowe’s

reports that its average annual lease payments total $384 million. This is a

minuscule figure compared to Lowe’s sales coming in at about 1% today and

0.2% at the end of our forecasts in 2017.

Financial Analysis

Performing ratio analysis on a company is very helpful when charting a

company’s performance over a certain period of time. The analysis produced

when evaluating and implementing these ratios sets a benchmark which is a

useful tool in comparing different companies within the same industry. There are

three major classifications of performance ratios: Liquidity Ratios, Profitability

Ratios, and Capital Structure Ratios. While using these different ratios analysis

we are able to pull information from all three financial statements. This allows for

a complete cross-examination of all the companies the statements.

Included in the final portion of the ratio analysis is the financial

forecasting model. A forecast is a prediction of the company’s future

performance based on their past performance. Financial forecasting, like the

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ratio analysis, is done by examining the companies past balance sheets, income

statements, and statement of cash flows.

Liquidity Analysis

Liquidity ratios are one of the most important ratios to consider when

evaluating a firm. These ratios relate how quickly a company can convert assets

into cash to cover their obligations in a timely manner. Lenders will usually prefer

a higher liquidity ratio because this indicates that the company has enough

resources to pay off its debt if they became financially inefficient. The most

relevant liquidity ratios to evaluate these firms include: Current Ratio, Quick

Asset Ratio, Accounts Receivable Turnover, Inventory Turnover, and Working

Capital Turnover.

Current Ratio (Current Assets/Current Liabilities)

The Current Ratio measures the relationship between all current assets to

all current liabilities. A higher ratio is preferred in this case because it means a

firm has enough liquid assets to pay off its recent payables.

2002 2003 2004 2005 2006

Lowe's 1.56 1.55 1.22 1.34 1.27

Home Depot 1.48 1.4 1.35 1.2 1.39

Sherwin Williams 1.39 3.19 1.17 1.22 1.18

Tractor Supply 1.73 1.9 1.9 1.83 2.58

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The Current Ratio for the home improvement retail industry seems quite

stable with some expansion and peaks for the smaller firms. Lowe’s has held a

consistent ratio of 1.4:1, while the industry has kept a steady 1.6:1 ratio for the

last five years. This is a satisfying average for the industry because for every one

dollar in liabilities, it has approximately $1.60 to cover it. The only outcast in the

group seems to be Tractor Supply. As noted earlier, Tractor Supply Co. is a

smaller firm in the industry that has been doing well in recent years. Although, it

seems that each developed company seems to level out right under 1.5:1 in the

home improvement retail industry. We should expect to see Tractor Supply do

the same in the coming years.

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Quick Asset Ratio (Quick Assets/Current Liabilities)

The Quick Asset Ratio is very similar to the Current Ratio except it

excludes inventories from the current assets. These “quick assets” give an

investor a clearer view of the firm because inventory can be difficult to turn into

cash in a given period. It is still relevant that a larger ratio is better in this case,

but the ratios will be significantly lower than the current ratio due to excluding a

large number like inventory from the equation.

2002 2003 2004 2005 2006

Lowe's 0.36 0.42 0.14 0.15 0.12

Home Depot 0.41 0.41 0.35 0.25 0.3

Sherwin Williams 0.61 0.73 0.51 0.54 0.65

Tractor Supply 0.092 0.12 0.13 0.07 0.14

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As with any retail industry, inventory is usually a big piece of their

reported current assets. This is why there is not as much concern that the

industry average is around .33:1 in the last five years. One noticeable difference

is how low Tractor Supply’s Quick Asset Ratio is compared to its Current Ratio.

The reason is because Tractor Supply carry’s an average of almost 86% of its

current assets as inventory every year. This explains the astonishing .11:1

average of its Quick Asset Ratio. At first sight, Lowe’s and Tractor Supply might

seem to be much too far under industry average, but both companies transferred

their accounts receivables in 2002 and 2003. This explains Lowe’s recession in

2004 and Tractor Supply’s consistent .11 average for the Quick Asset Ratio.

Accounts Receivable Turnover: (Sales/Accounts Receivable)

2002 2003 2004 2005 2006

Lowe's 151.81 211.22 N/A N/A N/A

Home Depot 54.33 59.08 48.76 34.02 28.18

Sherwin-Williams 10.52 9.94 8.44 8.89 9.02

Tractor Supply 11.85 N/A N/A N/A N/A

The accounts receivable turnover of a firm measures how effectively the

firm generates cash from the sales it makes on credit. This ratio is derived from

dividing the net sales of the company by the accounts receivable. This ratio is

hard to come by for Lowe’s and Tractor Supply since they no longer carry

accounts receivable in their books. A higher ratio is more attractive to investors

because the company then makes most of their sales on a cash basis rather than

extending credit to the customer. The ratios in the industry indicate that most

companies that do have accounts receivable have been eager to issue more do

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to the fact that their ratios are declining. This indicates more merchandise is

being sold on account in firms such as Home Depot and Sherwin-Williams.

Days Sales Outstanding: (365/Accounts Receivable Turnover)

2002 2003 2004 2005 2006

Lowe's 2.4 1.73 N/A N/A N/A

Home Depot 6.72 6.18 7.49 10.73 12.95

Sherwin-Williams 34.7 36.72 43.25 41.06 40.47

Tractor Supply 30.8 N/A N/A N/A N/A

The days sales outstanding is found by dividing the number of days in a

year (365) by the accounts receivable turnover found in the previous section.

This number shows the amount of time it takes for a company to get paid when

it extends credit to customers. A fewer amount of days is preferred because the

less time the customer takes to pay back the sale the better. In 2002 and 2003

Lowe’s very low days sales outstanding may be part of the plan of the company

to sell off all their accounts receivables. This plan led them to stop extending

credit to their customers and thus undervalued the accounts receivables it should

have had during the period. The low numbers of Home Depot indicate they are

too efficient in converting sales on credit to cash with an average over the last

five years of 8.81 days. The days sales outstanding is also important because it

is part of the cash-to-cash cycle of the firm which is discussed later in the report.

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Inventory Turnover: (Cost of Goods Sold/Inventory)

2002 2003 2004 2005 2006

Lowe's 4.58 4.64 4.05 4.29 4.3

Home Depot 4.82 4.87 4.83 4.75 4.76

Sherwin Williams 4.55 4.63 4.42 5.03 5.33

Tractor Supply 3 3.16 3.15 3.1 2.73

Inventory Turnover

0

1

2

3

4

5

6

2002 2003 2004 2005 2006

Year

Lowe'sHome DepotSherwin WilliamsTractor Supply

Inventory turnover measures the number of times the firm sells and

repurchases inventory during the year. This measure of operating efficiency is

found by taking the cost of goods sold and dividing the number by inventory at

the end of the year. The ratio is better when it is high rather than low, although

it can be seen as negative if the ratio is too high. A high ratio means the

company is selling goods quickly, however when the ratio is uncharacteristically

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high the company may not have enough inventory to satisfy their sales demand.

The industry average over the last five years is 4.25 while Lowe’s average is

4.37. This shows Lowe’s turns over their inventory more times a year than the

industry average. While this is good for Lowe’s, Home Depot has consistently

had a higher turnover due to their large volume of sales each year. Tractor

Supply has had the lowest inventory turnover each year but this may be due to

the high priced and specialized machinery they offer. Analysts who better

understand a company’s inventory turnover benefit by knowing how quickly the

company sells excess inventory.

Days Supply of Inventory: (365/Inventory Turnover)

2002 2003 2004 2005 2006

Lowe's 79.69 78.66 90.12 85.08 84.88

Home Depot 75.73 74.95 75.57 76.84 76.68

Sherwin Williams 80.22 78.83 82.58 72.56 68.48

Tractor Supply 121.67 115.51 115.87 117.74 133.7

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Days Supply of Inventory

0

20

40

60

80

100

120

140

160

2002 2003 2004 2005 2006

Year

Days

Lowe'sHome DepotSherwin WilliamsTractor Supply

The days supply of inventory measures the time it takes to sell a product

or the amount of time an item is “on the shelf” in a store. By again taking the

number of days in a year and dividing that by the inventory turnover found for

each company results in the number of days supply of inventory. The number of

days found is also important to investors because it is another part of the cash-

to-cash cycle. Lowe’s is doing well when compared to the industry because their

average days supply is 83.67 days while the industry average is 89.27 days. The

amount of days has declined for Lowe’s since their peak in 2003; although they

are still behind their leading competitor Home Depot.

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Working Capital Turnover (Sales/Working Capital)

Working Capital Turnover is used to show the relevance of the funds a

firm uses toward operations, and the sales it actually produces. Working capital

is simply current assets minus current liabilities. A company would like to have a

high Working Capital Turnover because it would like to produce a high volume of

sales compared to the money it uses to finance these sales operations.

2002 2003 2004 2005 2006Lowe's 13.12 13.28 29.05 22.11 26.44Home Depot 15 17.17 19.97 31.47 17.92Sherwin Williams 12.27 9.64 23.35 21.15 20.8Tractor Supply 8.62 8.13 8.02 8.59 5.69

Working Capital Turnover

0

5

10

15

20

25

30

35

2002 2003 2004 2005 2006

Lowe'sHome DepotSherwin williamsTractor Supply

The Home Improvement Retail Industry has increased its Working Capital

Turnover significantly since 2002. This is a good sign, not only for Lowe’s, but as

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an industry in itself. The industry averaged around 16:1 in the past five years,

and nearly 20:1 in the last three years. This means that for every $1 spent on

working capital, they are receiving nearly $20 in sales. Again, Tractor Supply

seems to be the only firm working against the industry average. This is because

they are a growing firm, and while their sales are continuously increasing, so are

their current liabilities to pay for expansion.

Conclusion

Lowe’s seems to be steadily in the mix within the industry averages

considering liquidity. The only exception is the quick asset ratio, which Lowe’s is

considerably lower than the industry average after 2003 due to the transferring

of their receivables to GE Financial. Lowe’s proves to be a very liquid firm in

comparison to the industry, and seems to run ratios relatively similar to its

largest and closest competitor Home Depot.

Profitability Analysis

Profitability ratios are used to determine where and how a firm is

producing its profit. Gross Profit Margin, Operating Profit Margin, and Net Profit

Margin are all used to determine operating efficiency. The next three include

Asset Turnover, Return on Assets, and Return on Equity.

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Gross Profit Margin (Gross Profit/Sales)

The Gross Profit Margin shows the percentage relationship between Sales

minus Cost of Goods Sold. A firm would prefer a higher percentage for Gross

Profit Margin because it would mean they are selling more while cutting costs for

the products.

2002 2003 2004 2005 2006

Lowe's 30.00% 31.03% 33.57% 34.20% 34.52%

Home Depot 31.0% 32.0% 33.0% 34.0% 33.0%

Sherwin Williams 45.10% 45.40% 44.19% 42.84% 43.72%

Tractor Supply 28.28% 30.48% 30.17% 30.93% 31.71%

Lowe’s has stayed within the industry average in relation to Gross Profit

Margin. The industry average has been around 35% in the last five years; While

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Lowe’s is operating near 33%, and increasing every year. This can be explained

by Lowe’s Sales growing by an average of 16% per year, while Cost of Goods

Sold are slowly growing at a 14% per year rate. Sherwin Williams is the only

company that throws the industry average off considering this ratio. They have

such a high margin because their primary product is paint. Paint is a very cheap

substance that Sherwin Williams uses the raw materials to mix on their own.

This, in turn, substantially reduces Cost of Goods Sold for Sherwin Williams

compared to the other three firms who must spend more when dealing with

numerous distributors.

Operating Profit Margin (Operating Income/Sales)

Operating Profit Marging is found by taking Income from Operations and

dividing it by Sales for the given year. This is another ratio that shows the

operating efficiency of a firm. A higher percentage means that a firm is able to

control the amount of operating expenses it reports year to year.

2002 2003 2004 2005 2006

Lowe's 9.08% 9.55% 9.65% 10.40% 10.65%

Home Depot 10.01% 10.56% 10.84% 11.49% 10.65%

Sherwin Williams 9.59% 9.67% 9.49% 9.13% 10.68%

Tractor Supply 5.33% 6.50% 5.84% 6.60% 6.25%

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The home improvement retail industry has maintained a steady 9.1%

Operating Profit Margin in the last five years. Lowe’s has been operating at

around 9.87%, and has been on the rise in recent years. This is a good sign for

Lowe’s because it remains above industry average meaning they are keeping

their operating expenses low (compared to revenue) relative to the industry

standard. It also tells investors and analysts that Lowe’s has been operating

efficiently for the last five years, and that Tractor Supply might be in some

trouble relying heavily on operating expenses compared to the industry.

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Net Profit Margin (Net Income/Sales)

Net Profit Margin is calculates by dividing Net Income by Sales. This ratio

gives an analyst a good look at how much money the company actually retained

compared to its sales dollars from year to year. Firms and investors would like

this ratio to be higher than previous years because this means the company is

retaining the sales and controlling its cost obligations.

2002 2003 2004 2005 2006

Lowe's 5.66% 5.93% 5.94% 6.39% 6.62%

Home Depot 6.29% 6.64% 6.84% 7.16% 6.34%

Sherwin Williams 2.46% 6.14% 6.43% 6.44% 7.38%

Tractor Supply 3.15% 3.78% 3.68% 4.14% 3.84%

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Lowe’s has been increasing its Net Profit Margin every year since 2002. In

the last five years, Lowe’s has had an average of 6.11% margin; While the home

improvement retail industry has averaged 5.56%. This means that Lowe’s is

operating efficiently due to the steady rise year to year, and being above the 5-

year industry average. An analyst would look at this from the perspective that in

2002 Lowe’s was receiving 5.7 cents in profit per sales dollar, and in 2006 Lowe’s

is retaining almost 6.7 cents per dollar. As an investor and analyst, this steady

increase could prove to be profitable in years to come. Sherwin Williams is the

only firm to raise suspicion, in which they jump back into the industry average

after a 2.46% margin in 2002. The reason for this was a $183 million change in

accounting principle that drove Sherwin Williams Net Income down to nearly

$127 million. Although, the firm proved to be efficient by striking within industry

average the following year.

Asset Turnover: Sales/Total Assets

2002 2003 2004 2005 2006

Lowe's 1.62 1.64 1.72 1.76 1.69

Home Depot 1.94 1.88 1.88 1.84 1.74

Sherwin Williams 1.51 1.47 1.43 1.65 1.56

Tractor Supply 2.64 2.74 2.56 2.54 2.35

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The asset turnover of a firm, as discussed earlier in the report as an

expense diagnostic, is the ratio of sales to total assets of a company. With the

vast size of the two entities used in the ratio, the asset turnover will almost

always be a low number. The industry average measuring asset productivity is

1.91 while Lowe’s average over the last five years has been 1.69. Lowe’s has

steadily improved from where they were five years ago by increasing their asset

productivity by 0.07. This means they are improving their profitability by

converting assets into sales.

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Return on Assets: (Net Income/Total Assets)

2002 2003 2004 2005 2006

Lowe's 10.20% 11.40% 11.55% 13.03% 12.60%

Home Depot 12.81% 14.34% 14.52% 15.01% 12.97%

Sherwin Williams 4.22% 9.02% 10.68% 10.84% 13.18%

Tractor Supply 9.57% 12.14% 11.90% 12.63% 11.17%

Return on assets, or rate of return on assets, is a ratio that is very useful

to investors. First, corporations want the ratio to be as high as possible since a

higher ROA yields higher net earnings. To compute this ratio the net income for

a given year is divided by the total assets of the firm from the previous year.

This way the net income is shown as an investment of the previous year’s total

assets. As shown in the graph, Lowe’s is up to par with their other competitors

with an average of 11.76% compared to the industry average of 11.69%.

Lowe’s has also been consistent in their ROA numbers which may result from a

management plan to keep their total assets at a proportionate level with net

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income. Only Home Depot has managed to consistently have a ROA higher than

Lowe’s over the last five years.

Return on Equity: (Net Income/Total Owner’s Equity)

2002 2003 2004 2005 2006

Lowe's 21.10% 22.03% 21.21% 23.97% 21.72%

Home Depot 22.14% 21.74% 22.32% 24.17% 21.41%

Sherwin Williams 10.35% 24.75% 26.96% 28.12% 33.29%

Tractor Supply 19.16% 24.44% 22.02% 23.12% 19.05%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

2002 2003 2004 2005 2006

Lowe'sHome DepotSherwin WilliamsTractor Supply

The return on equity for a firm measures the amount of net income per

one dollar of equity. This ratio is important because it gives the investors of the

company a clear view of the return generated their equity they have put into the

firm. Also, like return on assets, the ratio is found by dividing the current year’s

net income by the previous year’s equity. When analyzing the home

improvement industry it is evident that three of the four competitors have very

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similar ROE ratios. Sherwin Williams has done the most to improve its return on

equity by increasing the ratio to over 30%. Over the five year period three of

the four competitors remained relatively unchanged in their return. This shows

that as equity rises, the company becomes more valuable which causes income

levels to rise. The industry average for return on equity is 22.65% however

these numbers are somewhat bias because of the improving success of Sherwin

Williams and their ROE percentages. Lowe’s averaged 22.01% return on equity

over the five year span which shows they are remaining consistent with the

market.

Conclusion

The overall profitability of Lowe’s, shown by these ratios, enhance the

reasons they are a very profitable company. If one word were to describe

Lowe’s compared to the home improvement industry it would be consistency.

Although Lowe’s never leads the way in any of the profit ratios, they usually

remain at second or third when taking the averages of each firm over the five

years. Overall the industry numbers should all be pleasing to investors because

the yearly industry averages are increasing overtime. Lowe’s is no exception to

this and should be pleased with the ratios they have. As Lowe’s moves forward,

they increase profits even further as they expand into the global market.

Capital Structure Analysis

The capital structure of a company refers to the sources of financing used

to acquire assets and is shown by the liabilities and owners’ equity section of the

balance sheet (Financial Statement Analysis Handout). Firms grow by gaining

assets, but growing is not possible if the firm does not have the money to invest

in these assets. Therefore, they must pay particular interest in capital structure

ratios that relate information about servicing their financial obligations. There are

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three ratios that analysts take into account: Debt to Equity, Times Interest

Earned, and Debt Service Margin.

Debt to Equity (Total Liabilities/Total Owners’ Equity)

The debt to equity ratio explains a companys total liabilities divided by

total owners’ equity. This ratio is a good way to look at credit risk of a firm,

which means the possibility that interest and debt repayment cannot be satisfied

with available cash flows (Fin. Stat. Analysis Handout). In perspective, it shows

for every $1 of equity, how much are actually liabilities.

2002 2003 2004 2005 2006

Lowe's 0.94 0.84 0.84 0.72 0.77

Home Depot 0.52 0.54 0.61 0.65 1.09

Sherwin williams 1.56 1.52 1.59 1.52 1.51

Tractor Supply 1.01 0.85 0.83 0.71 0.68

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Debt to Equity

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2002 2003 2004 2005 2006

Lowe'sHome DepotSherwin williamsTractor Supply

Lowe’s has a very favorable debt to equity ratio compared to the industry

average of .97. They have been running at around .82. Meaning that for ever $1

of equity, .82 cents are liabilities. Home Depot has the lowest average ratio at

.68, but increased substantially in 2006 to 1.09. Sherwin Williams’ debt to equity

ratio average of 1.54 would be considered unfavorable as it is around 60%

higher than the industry average.

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Times Interest Earned: (Operating Income/Interest Expense)

The times interest earned ratio indicates the dollars of earnings available

for each dollar of interest payments. If the times interest earned ratio were one,

which would be very risky, it would indicate a firm is barely covering their

interest expense with income from operations. The higher the ratio the less risky

the situation is because interest can be paid more easily.

2002 2003 2004 2005 2006

Lowe's 14.03 17.36 21.00 29.46 33.45

Home Depot 157.58 110.42 113.23 65.48 24.68

Sherwin Williams 13.28 14.50 15.52 14.23 13.42

Tractor Supply 13.7 27.78 70.52 83.61 55.07

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

2002 2003 2004 2005 2006

Year

Low e's

Home Depot

Sherw in Williams

Tractor Supply

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Upon first glancing at the graph, the huge 2002 ratio for Home Depot

stands out. The reason for their large ratio is partly due to how Home Depot

runs their business. They pay for things with increases in equity as opposed to

increases in debt. This causes the interest expense to be low and thus resulting

in a high times interest earned ratio. By identifying this point as an outlier

because it is so much higher than the other ratios, a better picture of the

industry can be seen. The industry average for the data is 39.51 when

eliminating the outlier. While Lowe’s average is significantly less at 23.06, there

is no need to worry because they can still disburse their interest payments with

operating income.

Debt Service Margin (Operating Cash Flow/Notes Payable)

This ratio determines how well a company can cover its principal amounts

of long-term liabilities every year with the cash flows provided from operations.

The margin number is the amount of cash provided by operations to cover $1 of

long-term debt.

2002 2003 2004 2005 2006

Lowe's 51.41 104.62 39.91 6.10 140.69

Home Depot N/A 935.00 13.03 601.82 14.93

Sherwin williams 37.26 37.26 51.40 63.91 77.75

Tractor Supply N/A 187.96 227.33 112.45 83.07

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Debt Service Margin

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

900.00

1000.00

2002 2003 2004 2005 2006

Lowe'sHome DepotSherwin williamsTractor Supply

The debt service margin average for the home improvement retail

industry is very high. Not including obvious outliers like Home Depot, the

industry seems fair off when it comes to covering their installment payments.

Lowe’s is doing very well within the industry, and should be able to maintain a

debt service margin around the average for years to come.

Conclusion

In conclusion, Lowe’s has been consistently average within the capital

structure analysis. While the home improvement retail industry competes

relatively close within these ratios, Lowe’s has a noticeable expansion from 2005

to 2006 in each case. As for their debt to equity ratio, there was an expansion in

2006, but it has declined since 2002 overall. Lowe’s capital structure as a whole

reveals how debt and equity of the firm consistently service obligations.

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IGR and SGR Analysis

Internal Growth Rate: (ROA(1-Dividend %))

Internal growth rate is defined as the highest level of asset growth

achievable for a business without obtaining outside funding. This ratio proves to

be very helpful to investors because they get an idea of how the company is

growing their total assets without outside funds or financing. Asset growth is

generated instead by cash flows retained by the company. These cash flows are

known as retained earnings, and are put back into the firm at the end of the

accounting period.

2002 2003 2004 2005 2006Lowe's 9.74% 10.86% 10.93% 12.22% 11.48%Sherwin Williams 1.21% 6.56% 8.05% 8.18% 10.08%Home Depot 11.09% 12.36% 12.43% 12.81% 9.83%

During this five year span, Lowe’s has yielded an overall increase in their

internal growth rate. This is a good sign that the company is becoming ever

more able to grow assets using internal funds. These numbers are even more

impressive when analyzed further because Lowe’s is expanding their company.

Tractor Supply does not offer dividends and therefore cannot be analyzed with

the rest of the market. The internal growth rate is a crucial ratio when

estimating the overall growth of a company.

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Sustainable Growth Rate: (IGR(1+D/E))

The sustainable growth rate of a company measures the rate at which a

firm can grow while keeping its profitability and financial policies unchanged.

Sustainable growth rates can be linked to many other ratios described in this

report; although, the main driver is the internal growth rate.

2002 2003 2004 2005 2006Lowe's 18.89% 19.98% 20.11% 21.02% 20.32%Sherwin Williams 3.09% 16.53% 20.85% 20.61% 25.30%Home Depot 16.86% 19.03% 20.01% 21.14% 20.54%

The trend for Lowe’s is once again an increasing rate over the past five years.

The average SGR for Lowe’s over the time period from 2002-2006 has been

20.06%. This means that on average Lowe’s can grow up to 20.06% without

taking on additional debt or equity. If they want to grow at a rate higher than

the SGR they must acquire some type of funding for the company. Sustainable

growth rates can rise and fall but ultimately the company would not worry about

the fluctuations unless they are not expanding. An analyst might say a higher

SGR is preferred because it reflects fewer obligations on the company; however,

a low SGR as a result of aggressively expanding a company is not always a bad

thing.

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Financial Statement Forecasting

Financial statement forecasting is a very important and interesting part of

determining a firm’s value. It provides a tangible view of a firm’s future based

on forecast able numbers. We used the past five 10-K reports in order to

forecast the next ten years of Lowe’s income statements, balance sheets, and

statements of cash flows. The income statement was forecasted using historical

growth rates. While forecasting the balance sheet, we looked at growth rates

along with liquidity and profitability ratios. For the statement of cash flows we

looked at the CFFO/NI ratio to determine what we thought would be the most

accurate forecast. Both Lowe’s and the retail home improvement industry’s

averages were taken into consideration for each forecast.

Income Statement Forecast

Lowe’s net sales were increasing at a steady 18% from 2003 through

2006 but dropped to 8.5% in 2007. To forecast Lowe’s net sales for the next ten

years we used a moving average of the past five years sales growth rates. This

means that each year after 2007 was calculated using the five previous years

average growth rates. Our forecasted growth rates over the next ten years

came out to an average of 15.27%. We believe that although the growth rate

was 18% for the first four years of our historical figures, by including the 8.5%

growth rate in our moving average, it will forecast numbers that will be accurate

and account for future drops in the growth rate. We also thought that having a

below average growth rate will account for the recent decline in the housing

market.

Net earnings were forecasted by using the same moving average to

calculate the remaining future percentages from the common size income

statement. Once these percentages were calculated we were able to forecast

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gross margin, total expenses, and income taxes for the next ten years. We used

the moving average for the percentages in order for our numbers on the income

statement to match our net sales.

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Lowes Income Statement(In Millions)

Actual Financial Statements Forecast Financial Statements2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Net Sales 26,112 30,838 36,464 43,243 46,927 54,581 63,288 73,111 84,063 96,047 110,842 127,715 146,971 168,999 194,331 Cost of Sales 18,164 21,269 24,224 28,453 30,729 36,705 42,267 48,509 55,761 63,814 73,856 84,941 97,666 112,339 129,232 Gross Margin 7,948 9,569 12,240 14,790 16,198 17,876 21,020 24,602 28,301 32,233 36,986 42,774 49,305 56,660 65,099 Expenses:SG&A 4,625 5,578 7,562 9,014 9,738 10,713 12,664 14,911 17,086 19,422 22,297 25,816 29,768 34,182 39,267 Store Opening Costs 129 128 123 142 146 206 224 250 288 332 390 443 508 586 675 Depreciation 640 739 859 980 1,162 1,304 1,504 1,735 1,998 2,303 2,641 3,041 3,501 4,029 4,636 Interest 182 180 176 158 154 268 285 310 346 404 487 548 625 719 832 Total Expenses 5,576 6,625 8,720 10,294 11,200 12,491 14,677 17,205 19,718 22,462 25,815 29,848 34,402 39,515 45,410 Pre-tax Earnings 2,372 2,944 3,520 4,496 4,998 5,385 6,343 7,397 8,584 9,772 11,171 12,926 14,903 17,145 19,689 Income Tax Provision 901 1,122 1,353 1,731 1,893 2,056 2,424 2,829 3,279 3,727 4,267 4,938 5,692 6,547 7,518 Net Earnings 1,471 1,822 2,167 2,765 3,105 3,329 3,919 4,569 5,305 6,045 6,904 7,988 9,211 10,598 12,171

Common Size Income StatementActual Financial Statements Forecast Financial Statements

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Sales Percentage Growt 18.10% 18.10% 18.24% 18.59% 8.52% 16.31% 15.95% 15.52% 14.98% 14.26% 15.40% 15.22% 15.08% 14.99% 14.99%Cost of Sales 69.56% 68.97% 66.43% 65.80% 65.48% 67.25% 66.79% 66.35% 66.33% 66.44% 66.63% 66.51% 66.45% 66.47% 66.50%Gross Margin 30.44% 31.03% 33.57% 34.20% 34.52% 32.75% 33.21% 33.65% 33.67% 33.56% 33.37% 33.49% 33.55% 33.53% 33.50%Expenses:SG&A 17.71% 18.09% 20.74% 20.84% 20.75% 19.63% 20.01% 20.39% 20.33% 20.22% 20.12% 20.21% 20.25% 20.23% 20.21%Store Opening Costs 0.49% 0.42% 0.34% 0.33% 0.31% 0.38% 0.35% 0.34% 0.34% 0.35% 0.35% 0.35% 0.35% 0.35% 0.35%Depreciation 2.45% 2.40% 2.36% 2.27% 2.48% 2.39% 2.38% 2.37% 2.38% 2.40% 2.38% 2.38% 2.38% 2.38% 2.39%Interest 0.70% 0.58% 0.48% 0.37% 0.33% 0.49% 0.45% 0.42% 0.41% 0.42% 0.44% 0.43% 0.43% 0.43% 0.43%Total Expenses 21.35% 21.48% 23.91% 23.81% 23.87% 22.88% 23.19% 23.53% 23.46% 23.39% 23.29% 23.37% 23.41% 23.38% 23.37%Pre-tax Earnings 9.08% 9.55% 9.65% 10.40% 10.65% 9.87% 10.02% 10.12% 10.21% 10.17% 10.08% 10.12% 10.14% 10.14% 10.13%Income Tax Provision 3.45% 3.64% 3.71% 4.00% 4.03% 3.77% 3.83% 3.87% 3.90% 3.88% 3.85% 3.87% 3.87% 3.87% 3.87%Net Earnings 5.63% 5.91% 5.94% 6.39% 6.62% 6.10% 6.19% 6.25% 6.31% 6.29% 6.23% 6.25% 6.27% 6.27% 6.26%

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Balance Sheet Forecast

Lowe’s balance sheet seemed to provide plenty of forecast able numbers.

As with the income statement we first created a common size balance sheet, and

then looked for trends in the percentage numbers. Total assets were forecasted

by finding the average percentage change over the past five years, which came

out to 14.59%. To determine if these forecasts seemed accurate, we looked at

the asset turnover and accounts receivable turnover ratios. The accounts

receivable turnover ratio didn’t help us with the forecasts because of Lowe’s

reporting $0 accounts receivable over the past couple years. We determined

that our numbers were accurate when we looked at the asset turnover ratio

because the forecasted numbers that the asset turnover ratio produced were

different by only 7.98% on average.

We forecasted current assets by calculating the average percentage of

current assets to total assets. Once current assets were forecasted, we used the

average current ratio over the past five years to forecast current liabilities. This

helped us forecast total liabilities by finding the average percentage of current

liabilities to total liabilities. To forecast owners’ equity we first forecasted Lowe’s

dividends for the next ten years. We forecasted dividends by calculating the

average difference between each of the past five year’s dividends and then

adding that number to each year after 2007. Once we forecasted dividends we

calculated future owners’ equity by taking the 2007 owners’ equity and adding

the forecasted 2008 net earnings and then subtracting the forecasted 2008

dividends. We then did the same thing for each year up to 2017. To make sure

our owners’ equity numbers were accurate we looked at the return on equity and

found that our numbers were only 9.45% off on average.

Once our forecasted owners’ equity numbers were found to be close to

return on equity we adjusted our total liabilities, and all numbers that would be

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affected by that adjustment, in order to ensure that assets equaled liabilities plus

owners’ equity. All other forecasted numbers on the balance sheet were

calculated using the average percentages forecasted on the common size

balance sheet.

Lowe's Balance Sheet(In Millions)

Actual Financial Statements Forecast Financial Statements2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

AssetsCurrent Assets:Cash and cash equivalents 853 913 642 423 364 1032 1029 1008 1092 1312 1636 1784 1987 2277 2635Short-term investments 273 711 171 453 432Accounts Receivable 172 146 9 0 0 0 0 0 0 0 0 0 0 0 0Merchandise Inventory 3968 4584 5982 6635 7144 8269 9537 11062 12456 14167 16233 18580 21222 24186 27614Deffered Income Taxes 58 62 95 155 161 149 178 218 255 282 314 365 420 480 544Other Current Assets 244 106 75 122 213Total Current Assets 5568 6522 6974 7788 8314 10423 11766 13262 15022 17178 19840 22567 25696 29343 33543

Property (less depreciation) 10352 11819 13911 16354 18971 20847 23886 27554 31470 35971 40848 46736 53427 61019 69650Long-term investments 29 169 146 294 165Other Assets 160 241 178 203 317Total Assets 16109 18751 21209 24639 27767 31820 36320 41551 47352 54111 61792 70572 80565 92013 105073

Liabilities and Stockholder's EquityCurrent Liabilities:Short-term borrowings 50 0 0 0 23Current maturities of long-term debt 29 77 630 32 88Accounts Payable 1943 2212 2687 2832 3524 3864 4416 5082 5750 6641 7532 8609 9835 11228 12834Employee Retirement Plan 88 0 0 0 0 0 0 0 0 0 0 0 0 0 1Accrued Salaries and Wages 306 335 386 424 372 545 609 687 767 866 1021 1158 1316 1500 1714Self Insurance Liabilities 0 0 0 571 650 741 848 969 1105 1262 1442 1646 1880 2147 2451Deffered Revenue 0 0 0 709 731 877 978 1132 1283 1470 1676 1916 2186 2498 2852Other current liabilities 1162 1576 2016 1264 1151Total Current Liabilities 3578 4200 5719 5832 6539 7019 7631 8333 8995 9818 10722 11681 12682 13766 14918

Long-term debt 3736 3678 3060 3499 4325Deffered Income taxes 478 594 736 735 735Other Long-term Liabilities 15 63 159 277 443Total Non-Current Liabilities 4229 4335 3955 4511 5503 6232 6776 7399 7986 8717 9520 10371 11260 12222 13245Total Liabilities 7807 8535 9674 10343 12042 13251 14407 15732 16981 18536 20242 22053 23942 25989 28163

Stockholder's EquityPreferred Stock- $5 par value, none iss 0 0 0 0 0Common Stock- $.50 par value Shares Issued and outstanding 391 394 387 784 762Capital in excess of par value 2023 2247 1514 1320 102Retained Earnings 5887 7574 9634 12191 14860 14342 16989 19967 23003 26189 29275 33760 38711 44211 50374Accumulated and other comprehensive 1 1 0 1 1Total Stockholder's Equity 8302 10216 11535 14296 15725 18569 21913 25819 30371 35575 41550 48519 56623 66024 76910Total Liabilities and Stockholder's 16109 18751 21209 24639 27767 31820 36320 41551 47352 54111 61792 70572 80565 92013 105073

Common Size Balance SheetActual Financial Statements Forecast Financial Statements

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017AssetsCurrent Assets:Cash and cash equivalents 5.30% 4.87% 3.03% 1.72% 1.31% 3.24% 2.83% 2.43% 2.31% 2.42% 2.65% 2.53% 2.47% 2.47% 2.51%Short-term investments 1.69% 3.79% 0.81% 1.84% 1.56%Accounts Receivable 1.07% 0.78% 0.04% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Merchandise Inventory 24.63% 24.45% 28.21% 26.93% 25.73% 25.99% 26.26% 26.62% 26.31% 26.18% 26.27% 26.33% 26.34% 26.29% 26.28%Deffered Income Taxes 0.36% 0.33% 0.45% 0.63% 0.58% 0.47% 0.49% 0.52% 0.54% 0.52% 0.51% 0.52% 0.52% 0.52% 0.52%Other Current Assets 1.51% 0.57% 0.35% 0.50% 0.77%Total Current Assets 34.56% 34.78% 32.88% 31.61% 29.94% 32.76% 32.39% 31.92% 31.72% 31.75% 32.11% 31.98% 31.89% 31.89% 31.92%

Property (less depreciation) 64.26% 63.03% 65.59% 66.37% 68.32% 65.52% 65.77% 66.31% 66.46% 66.48% 66.11% 66.22% 66.32% 66.32% 66.29%Long-term investments 0.18% 0.90% 0.69% 1.19% 0.59%Other Assets 0.99% 1.29% 0.84% 0.82% 1.14%Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Liabilities and Stockholder's EquityCurrent Liabilities:Short-term borrowings 0.31% 0.00% 0.00% 0.00% 0.08%Current maturities of long-term debt 0.18% 0.41% 2.97% 0.13% 0.32%Accounts Payable 12.06% 11.80% 12.67% 11.49% 12.69% 12.14% 12.16% 12.23% 12.14% 12.27% 12.19% 12.20% 12.21% 12.20% 12.21%Employee Retirement Plan 0.55% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Accrued Salaries and Wages 1.90% 1.79% 1.82% 1.72% 1.34% 1.71% 1.68% 1.65% 1.62% 1.60% 1.65% 1.64% 1.63% 1.63% 1.63%Self Insurance Liabilities 0.00% 0.00% 0.00% 2.32% 2.34% 2.33% 2.34% 2.33% 2.33% 2.33% 2.33% 2.33% 2.33% 2.33% 2.33%Deffered Revenue 0.00% 0.00% 0.00% 2.88% 2.63% 2.76% 2.69% 2.72% 2.71% 2.72% 2.71% 2.71% 2.71% 2.71% 2.71%Other current liabilities 7.21% 8.40% 9.51% 5.13% 4.15%Total Current Liabilities 22.21% 22.40% 26.96% 23.67% 23.55% 23.60% 23.34% 22.99% 22.86% 22.87% 23.13% 23.04% 22.98% 22.98% 23.00%

Long-term debt 23.19% 19.61% 14.43% 14.20% 15.58%Deffered Income taxes 2.97% 3.17% 3.47% 2.98% 2.65%Other Long-term Liabilities 0.09% 0.34% 0.75% 1.12% 1.60%Total Non-Current Liabilities 26.25% 23.12% 18.65% 18.31% 19.82% 21.23% 20.22% 19.65% 19.85% 20.15% 20.22% 20.02% 19.98% 20.04% 20.08%Total Liabilities 48.46% 45.52% 45.61% 41.98% 43.37% 41.65% 39.67% 37.86% 35.86% 34.26% 32.76% 31.25% 29.72% 28.24% 26.80%

Stockholder's EquityPreferred Stock- $5 par value, none iss 0.00% 0.00% 0.00% 0.00% 0.00%Common Stock- $.50 par value Shares Issued and outstanding 2.43% 2.10% 1.82% 3.18% 2.74%Capital in excess of par value 12.56% 11.98% 7.14% 5.36% 0.37%Retained Earnings 36.54% 40.39% 45.42% 49.48% 53.52% 45.07% 46.78% 48.05% 48.58% 48.40% 47.38% 47.84% 48.05% 48.05% 47.94%Accumulated and other comprehensive 0.01% 0.01% 0.00% 0.00% 0.00%Total Stockholder's Equity 51.54% 54.48% 54.39% 58.02% 56.63% 58.35% 60.33% 62.14% 64.14% 65.74% 67.24% 68.75% 70.28% 71.76% 73.20%Total Liabilities and Stockholder's 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

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Statement of Cash Flow Forecast

When forecasting Lowe’s statement of cash flows we considered the

CFFO/NI and historical growth rates. We created a common size statement of

cash flows and looked for any trends. For operating cash flows we decided to

follow our methodology used to forecast the income statement and balance

sheet and use historical growth rates. After finding the average growth rate for

operating cash flows we compared them with the CFFO/NI ratio and found that

they were very close by an average of 5.62%. This affirmed that the numbers

we found using the historical growth rates should be accurate. The other

numbers were forecasted using historical growth rates as well.

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Lowe's Statement of Cash Flow(in Millions) Actual Financial Statements Forecast Financial Statements

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Cash flows from operating activities:Net Earnings 1471 1822 2167 2765 3105 3329 3919 4569 5305 6045 6904 7988 9211 10598 12171Earnings from discontinued operations, net of tax -12 0 0 0 0Earnings from continuing operations 1459 1822 2167 2765 3105 3329 3919 4569 5305 6045 6904 7988 9211 10598 12171

Depreciation and Amortization 659 807 926 1051 1237Deferred Income tax 221 143 102 -37 -6Loss on disposition/writedown of fixed and other assets 18 31 55 31 23Share-based payment expense 51 70 76 62Tax effect of stock options exercised 29 31 33 59Changes in operating assets and liabilities:Accounts receivable-net -9 23 125 -9Merchandise Inventory-net -357 -571 1358 -785 -509Other operating assets -9 -10 156 -38 -135Accounts payable 202 421 483 137 692employee retirement planOther operating liabilities 421 286 472 642 33Net cash provided by operating activities 3033 3034 3073 3842 4502 4486 6160 7359 7673 8637 10002 12102 13865 15620 17820

Cash flows from investing activities:Purchases of short-term investments -128 -2759 -1180 -1829 -284Proceeds from sale/maturity of short-term investments 2828 1799 1802 572Purchases of long-term investments -24 -381 -156 -354 -558proceeds from sale/maturity of long-term investments 193 28 55 415Increase in other long-term assets -33 -95 -12 -30 -16Fixed assets acquired -2336 -2345 -2927 -3379 -3916Proceeds from the sale of fixed and other long-term assets 44 72 86 61 72Net cash used in investing activities -2477 -2487 -2362 -3674 -3715 -3326 -3518 -3751 -4065 -4153 -4252 -4461 -4674 -4883 -5068

Cash flows from financing activities:Net increase from short-term borrowings -50 -50 23Long-Term debt borrowingProceeds from issuance of long-term debt 0 0 0 1013 989Repayment of long-term debt -63 -29 -82 -633 -33Proceeds from issuance of common stock under employee stock purchase plan 50 52 61 65 76Proceeds from issuance of common stock from stock options exercised 65 97 90 225 100Cash dividend payments -66 -87 -116 -171 -276Repurchase of common stock 0 0 -1000 -774 -1737Excess tax benefits of share-based payments 12Net cash used in financing activities -64 -17 -1047 -275 -846 -410 -646 -803 -733 -778 -793 -922 -989 -1033 -1032

Net decrease in cash and cash equivalents 129 530 -336 -107 -59Cash and cash equivalents beginning of year 244 336 866 530 423Cash and cash equivalents, end of year 373 866 530 423 364 511 539 473 462 470 491 487 477 477 480

Common Size Statement of Cash FlowActual Financial Statements Forecast Financial Statements

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Cash flows from operating activitiesNet Earnings 100.82% 100.00% 100.00% 100.00% 100.00%Earnings from discontinued operations, net of tax -0.82%Earning from continuing operations 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Depreciation and Amortization 21.73% 26.60% 30.13% 27.36% 27.48%Deferred Income tax 7.29% 4.71% 3.32% -0.96% -0.13%Loss on disposition/writedown of fixed and other assets 0.59% 1.02% 1.79% 0.81% 0.51%Share-based payment expense 1.68% 2.28% 1.98% 1.38%Tax effect of stock options exercised 0.96% 1.02% 1.07% 1.54%Changes in operating assets and liabilities:Accounts receivable-net -0.30% 0.76% 4.07% -0.23%Merchandise Inventory-net -11.77% -18.82% 44.19% -20.43% -11.31%Other operating assets -0.30% -0.33% 5.08% -0.99% -3.00%Accounts payable 6.66% 13.88% 15.72% 3.57% 15.37%employee retirement planOther operating liabilities 13.88% 9.43% 15.36% 16.71% 0.73%Net cash provided by operating activities 38.74% 39.95% 123.01% 29.33% 31.03% 34.76% 57.19% 61.07% 44.66% 42.88% 44.87% 51.50% 50.53% 47.39% 46.42%

Cash flows from investing activities:Purchases of short-term investments 5.17% 110.94% 49.96% 49.78% 7.64%Proceeds from sale/maturity of short-term investments -113.71% -76.16% -49.05% -15.40%Purchases of long-term investments 0.97% 15.32% 6.60% 9.64% 15.02%proceeds from sale/maturity of long-term investments -7.76% -1.19% -1.50% -11.17%Increase in other long-term assets 1.33% 3.82% 0.51% 0.82% 0.43%Fixed assets acquired 94.31% 94.29% 123.92% 91.97% 105.41%Proceeds from the sale of fixed and other long-term assets -1.78% -2.90% -3.64% -1.66% -1.94%Net cash used in investing activities 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cash flows from financing activities:Net increase from short-term borrowings 78.13% 294.12% -2.72%Long-Term debt borrowingProceeds from issuance of long-term debt -368.36% -116.90%Repayment of long-term debt 98.44% 170.59% 7.83% 230.18% 3.90%Proceeds from issuance of common stock under employee stock purchase plan -78.13% -305.88% -5.83% -23.64% -8.98%Proceeds from issuance of common stock from stock options exercised -101.56% -570.59% -8.60% -81.82% -11.82%Cash dividend payments 103.13% 511.76% 11.08% 62.18% 32.62%Repurchase of common stock 95.51% 281.45% 205.32%Excess tax benefits of share-based payments -1.42%Net cash used in financing activities 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Net decrease in cash and cash equivalents 34.58% 61.20% -63.40% -25.30% -16.21%Cash and cash equivalents beginning of year 65.42% 38.80% 163.40% 125.30% 116.21%Cash and cash equivalents, end of year 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

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Conclusion

Our forecast of Lowe’s is conservative and should mirror the actual

numbers closely. We believe that our numbers might be a little low initially in

some areas, but will resemble the actual numbers after a few years. If sales

grew at a rate of 18% like they have for the past five years we believe the

forecasted number for 2015 would be unrealistic. Lowe’s almost doubles its

sales and assets every five years, which our forecast predicts. One weakness in

our forecast might be that with Home Depot’s steadily growing sales rate our

numbers could be incorrect as far as Lowe’s net sales. It’s hard to predict what

will happen as Home Depot’s sales continue to increase even though its assets

aren’t increasing as fast as Lowe’s.

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Weighted Average Cost of Capital

To look at a company financially the WACC is a very common value to

consider. This takes into account the weight of the equity and debt in a firm and

compares them to the rates of the market. Companies look at the value of the

WACC before tax because it will always give you a bigger value than after tax for

forecasting. To find Lowe’s weighted average cost of capital we had to find their

cost of equity, cost of debt, and the weight of debt and equity to the value of the

firm.

Cost of Equity

The CAPM model: Ke= Rf + Beta(Rf-Rm) is used to compute the cost of

equity. The Risk Free Rate (Rf) came from the St. Louis FRED. The regression

results gathered above are using the 3 month, 1 year, 2 year, 5 year, 7 year,

and 10 year. For each year we used 72 months, 60 months, 48 months, 36

months, and 24 months to find the highest adjusted R^2 which can explain the

best. The reason we used different time periods for the regressions is so we

could find the period of time that has the best explaining power. The adjusted

R^2 is the explaining power of the regressions, which is why we chose the one

with the highest adjusted R^2. The regression model that has the best

explaining power will give us the most accurate beta to use in our CAPM

equation to get the cost of equity. The 72 month regressions had the highest

adjusted R^2 which is not a surprise as you lose statistical power as you

decrease the observations. From these regression results we can gather the

beta which is 1+-.01 for the 72 month results. With a one beta Lowe’s has a low

systematic risk and moves really close to the market. This beta from our

regression table is a little bit lower than the published data of 1.31. The reason

ours is lower is that we account for more observations and for most companies

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in the long run they will get a beta closer to one. For the market risk premium

(Rm-Rf) the value is 8% which is an average return for large corporations on

the S&P 500 in the last year. The 1 year treasury rates gave the highest

adjusted R^2 before the rounding to 11%. The risk free rate is 4.14% which is

found from the St. Louis website. Given these values the Ke equation looks like

Ke= .0414 + 1.01(.08). This gives you a cost of equity of 12.22%.

10 Year Rate Observation Beta T Stat Adjusted R^2 72 0.99 3.11 0.11 60 1.14 2.49 0.08 48 1.23 1.92 0.05 36 1.46 1.79 0.06 24 1.29 1.02 0 7 Year Rate Observations Beta T Stat Adj. R^2 72 1 3.11 0.11 60 1.14 2.5 0.08 48 1.23 1.93 0.06 36 1.46 1.79 0.06 24 1.29 1.02 0 5 Year Rate Observations Beta T Stat Adjusted R^2

72 1 3.12 0.11 60 1.15 2.51 0.08 48 1.23 1.93 0.06 36 1.46 1.79 0.06 24 1.29 1.02 0

2 Year Rate Observations Beta T Stat Adjusted R^2 72 1.01 3.14 0.11 60 1.15 2.53 0.08 48 1.23 1.94 0.06 36 1.46 1.8 0.06 24 1.29 1.02 0

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1 Year Rate Observations Beta T Stat Adjusted R^2 72 1.01 3.16 0.11 60 1.16 2.54 0.08 48 1.24 1.95 0.06 36 1.47 1.8 0.06 24 1.28 1.01 0 3 Month Rate Observations Beta T Stat Adjusted R^2 72 1.01 3.15 0.11 60 1.06 2.54 0.08 48 1.24 1.95 0.06 36 1.47 1.8 0.06 24 1.28 1 0

Cost of Debt

After finding the items of debt on the balance sheet for Lowe’s you find

the weight of each item to the total liabilities. Then the value weighted rate is

just the weight times the stated rate of the items. The stated rate of the short

term items was 5.4%, and 7.24% for the long term debt according to the 10-K.

The percentages for the rate were assumed that all were the same considering

the interest rate can not vary by much and were not stated in the 10-K. Then

just add the value weighted rates to get the 5.07% of Kd.

Weight Rate Value Weighted Rate

Current maturities of long-term debt 88 0.0073077 0.054 0.0395%Accounts Payable 3524 0.2926424 0.054 1.5803%

Other Current Liabilities 1151 0.09558212 0.054 0.5161%

Long Term Debt 4325 0.3591596 0.0724 2.6634%Other Long-term Liabilities 443 0.03678791 0.0724 0.26634%

Total Liabilities 12042

Kd=5.07%

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Now plug in the numbers from above to figure out the WACC. The

formula for WACC before tax is (Vd/Vf)*Kd + (Ve/Vf)*Ke. So the WACC before

tax is (12,042/27,767)*.0507 + (15,725/27.767)*.1222. Lowe’s WACC bt comes

out to 9.12%. For WACC after tax you use the same equation except multiply

the Kd by 1 minus the tax rate. The corporate tax rate that Lowe’s uses is 35%.

The WACC after tax comes out to 8.35%.

Intrinsic Valuations

Discounted Dividends Model

The Discounted Dividends Model is a valuation that says the value of a

firm’s equity is the present value of all future dividends paid to shareholders. The

DDM is not a very reliable valuation because it depends heavily on forecasted

future dividends and growth rates. When using this model in reality, it is very

hard to set a standard forecasted measure on such a volatile number as

dividends for any firm. To use this model, the equation involves discounting the

future dividends back to the present value to value the firm. The following

valuation uses this model in respect to Lowe’s.

g Sensitivity Analysis 0 0.03 0.06 0.075 0.08 12.01 15.35 28.71 95.49 0.09 10.85 13.15 20.02 33.77 Ke 0.1 9.93 11.57 15.66 21.40 0.11 9.17 10.38 13.04 16.08 0.1222 8.41 9.28 10.97 12.63

Over Valued < $21.79

Fairly Valued within 20%

Under Valued > $31.38 Observed Price (as of November 1, 2007) - $26.15

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We found that Lowe’s dividends increase annually at an average of around

$.052. Therefore, we grew our dividends by this amount each year for ten years.

Then, we discounted these dividends to their present value, and found the sum

to give us the total PV of all future dividends. Next, we used the perpetuity

equation by using the 11th year dividend payout of $0.95, and divide it by the

Cost of Equity of 12.22% minus a growth rate of zero (shown below).

Po=Σ[dt/(Ke-g)t]

We can then add our total PV of annual dividends and the terminal PV perpetuity

to get to an estimated share price of $8.72 as of February 1, 2007. Although, to

value Lowe’s for November 2007, we must get the future value by using the

equation FV=1.41*(1+Ke) ^ (9/12). This will grow our share price by 9 months

to get a November share price of $9.51. This price is much smaller than the

November 1, 2007 observed share price of $26.15.

This model illustrates that investors obviously do not buy Lowe’s stock for

dividend expectations. The sensitivity analysis shows that even with a greater

growth rate of 7.5%, the share price cannot get within 20% of the observed

share price. The only way Lowe’s could come within reach of the observed share

price would be to cut cost of equity to 9% and grow their dividends at 6%, or

cut cost of equity to 10% and grow dividends at 7.5%. Neither of these options

seems realistic due to Lowe’s never having showed cutting cost of equity or

increasing dividends at this rate in this past. In conclusion, Lowe’s is extremely

over valued using the discounted dividends model; although, this valuation

model is very inaccurate due to uncertainty in respect to forecasted dividends

and growth rates.

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Discounted Free Cash Flows

The discounted free cash flow model of valuation is different from each of

the other models presented; it is different in that it uses the WACC before tax as

the discount rate rather than the cost of equity (Ke). As you can see from our

model the Lowe’s Company WACC is 9.15%. To begin this model you must first

calculate the future cash flows which are done by, subtracting cash flows from

investing activities from cash flows from operations. You then take your

calculated FCF and multiply that by a present value factor (1/ (1+WACC)t), which

accounts for each forecasted year. Once you have successfully forecasted each

year a terminal value of perpetuity is then estimated and discounted back just as

the future cash flows. You then are able to determine the value of the firm by

adding the present value of free cash flows and present value of terminal

perpetuity. The value of the firm is then subtracted from the total liabilities found

on Lowe’s balance sheet. This successfully gives us an estimated market value of

equity; the calculated equity is then divided by the number of shares outstanding

completing our valuation of the firm.

Once the value of the company has been calculated a sensitivity analysis

(shown below) can be run to show how a change in the WACC before tax and/or

a change in the growth rate can manipulate the stock price of the firm. The

sensitivity analysis below shows Lowe’s to be most fairly valued when the WACC

is 18% and has a growth rate of 5%. In this case, the share price of $23.75 is

the closest estimate to the November 1, 2007 share price of $26.15.

What the model has been able to show through the valuation model and

sensitivity analysis is that Lowe’s Company Inc.’s share price with a WACC of

9.15% and a growth rate of 1% is strongly overvalued at $72.08. As you can see

by the trend in the analysis that the prices continue to rise as the growth rates

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increase. By looking at this analysis Lowe’s is not considered a fairly valued

company until it reaches a WACC of 15%. However, once the 15% mark is

reached the manipulated prices still fluctuate around the observed share price of

$26.15.

G

0.01 0.02 0.03 0.04 0.050.085 81.37 91.4 105.07 124.83 155.87

0.0912 72.46 80.49 91.15 105.97 127.98WACC 0.1222 43.52 46.67 50.5 55.27 61.35

0.15 29.23 30.82 32.68 34.87 37.50.18 19.6 20.44 21.4 22.49 23.75

Under Valued >31.38Fairly Value within 20%Over Valued <21.79

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Residual Income Model

The residual income model is one of the best models to look at for valuing

a company. It links the income statement and balance sheet to help value the

company. The residual income is found by using the forecasted earnings and

subtracting the normal (benchmark) earnings. By using the forecasted earnings

the numbers are more accurate that are used in the model compared to the

other valuation models. Below is the sensitivity analysis derived from the

valuations of the model and an explanation of how the values were found. growth Sensitivity Analysis -0.1 -0.2 -0.3 -0.4 0.1 30.73 28.63 27.57 26.94 Ke 0.11 28.12 26.34 25.42 24.87 0.1222 25.3 23.83 23.06 22.58 0.13 23.67 22.38 21.68 21.25 0.14 21.78 20.67 20.06 19.68

Overvalued<$20.92 Undervalued >$31.38 Fairly Valued within 20%

Observed Price $26.15 (as of November 1, 2007)

To find the price per share in the sensitivity analysis was in most ways

similar to the other models. To get the book value equity you use the previous

year’s book value equity, add the earnings for this year and then subtract the

dividends. The next value we had to find is the normal (benchmark) earnings.

To find this we took the earnings and multiplied it by the cost of equity that we

calculated. The residual income is then the earnings subtracted by the

benchmark earnings. We have to take the residual income figures and discount

them back to time zero for our calculations. To get the present value factor you

use the equation, 1/(1+Ke)^n. In this equation Ke is the cost of equity and n is

the period in which the residual income figure is in. To discount these back we

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multiplied the residual income by the present value factor of that year. This is a

chart showing the present value of the residual incomes.

0 1 2 3 4 5 6 7 8 9 10

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

PV

of RI

1254 1310 1338 1355 1311 1280 1299 1305 1303 1295

Overtime the residual income is supposed to get close to zero or decrease

in value as the company is getting level with the market, this is why we used

negative growth rates in the model. If we used positive rates then the residual

income would be increasing also, which should not happen. Lowe’s residual

income does not change much as it stays pretty close to 1300. Over the life

span of Lowe’s the residual income will eventually be close to zero, but according

to our forecasts, not in the next 10 years. With a high residual income like

Lowe’s has means doing better than the benchmark consistently which shows

they are holding their value and not spending more money than they are

making. This shows how forecasting can not always be accurate as the future is

always unpredictable.

Looking at the residual income sensitivity analysis for the residual income

model, Lowe’s Company shows that it is a fairly valued company. Lowe’s is

overvalued only when the growth rate is really high and the cost of equity is also

high. Throughout most of the analysis chart the numbers are around the $26.15

observed share price on November 1, 2007. The breaking points for being fairly

valued were $20.92 and $31.38 (over 20% above or below $20.15) and as we

said earlier most of the chart, except for the extreme conditions for high growth

rate and cost of equity, Lowe’s is fairly valued.

109

Long Run Residual Income

The long run residual income is done by using the MVE equation. This

uses the ROE, Ke, and average growth of ROE. This is another way to look at a

firm and see how it is valued compared to the observed share price. The

equation looks like:

MVE= BVEo ( 1 + (ROE-Ke) / (Ke- g)

To get the ROE we divided the earnings of this year and divided it by the

BVE of last year. The ROE is 21% in year 1 and slowly declines to a little over

18%, which is why we used 18% as our ROE. To get the growth rate, we just

got the average growth or decline of the ROE, which for Lowe’s is -1.52%. The

Ke we used the 12.22% we calculated from the CAPM model and BVEo we just

used the time zero book value of equity. Plugging these numbers into the MVE

equation and dividing by the number of shares outstanding of 1525 we got the

value of $13.90. After getting the time consistent price up to November 1, 2007

we got a value of $15.15. Using three different sensitivity analysis charts since

there are three different values instead of two, we show that Lowe’s is

overvalued. We just kept one of the values constant while changing the other

two in the analysis.

ROE 0.17 0.18 0.19 0.2 0.1 17.81 18.77 19.73 20.69 Ke 0.11 16.49 17.39 18.28 19.17 0.1222 15.15 15.97 16.79 17.61 0.13 14.41 15.19 15.97 16.75 (Holding g constant at -1.52%)

Overvalued < $20.92 Undervalued > $31.38 Fairly Valued

110

g -0.01 -0.0152 -0.03 -0.04 0.17 15.31 15.15 14.77 14.56 ROE 0.18 16.16 15.97 15.51 15.25 0.19 17.01 16.79 16.25 15.94 0.2 17.86 17.61 16.99 16.64

(Holding Ke constant at 12.22%)

Overvalued < $20.92 Undervalued > $31.38 Fairly Valued

g -0.01 -0.0152 -0.03 -0.04 0.1 19.13 18.77 17.89 17.40 0.11 17.66 17.39 16.73 16.35 Ke 0.1222 16.16 15.97 15.51 15.25 0.13 15.34 15.19 14.83 14.63

(Holding ROE constant at 18%)

Overvalued < $20.92 Undervalued > $31.38 Fairly Valued

According to all three of the long run residual income models Lowe’s is

overvalued. The Ke has the biggest impact on these models compared to ROE

and BE, the Ke would have to be considerably lower than the calculated 12.22%

to bring the price up to fair value. This situation is very unlikely and will

definitely not happen in the near future. Overall, according to this valuation,

Lowe’s is an overvalued company.

111

Abnormal Earnings Growth Model

The abnormal earnings growth model represents how a DRIP income

affects the intrinsic market price of a share. Drip, or Dividend Reinvestment and

Repurchase Plan, can be computed by the dividends in the previous year

multiplied by the cost of equity. In order to find the AEG for Lowe’s the

forecasted earnings and the forecasted annual dividends must be used. The AEG

model is related to the price to earnings comparable method because they are

based upon the some theory. This model is unique in that it discounts values

back to year one instead of year zero. This valuation model is directly linked to

the residual income valuation; therefore the model can be proven using check

figures.

Sensitivity Analysis

G

-0.1 -0.2 -0.3 -0.4

0.1 48.49 46.16 44.99 44.29

Ke 0.11 40.69 38.90 37.98 37.42

0.122 33.32 32.09 31.29 30.95

0.13 29.53 28.42 27.83 27.46

0.14 25.47 24.59 24.11 23.80

Under Valued>$31.38

Fairly Valued within 20%

Over Valued<$20.92

AEG and R.I. Proof

To begin the AEG valuation we first had to calculate the DRIP income by

multiplying the cost of equity by the dividends in the previous year. Then the

cumulative dividend income must be computed by summing the earnings and

2009 2010 2011 2012 2013 2014 2015 2016 2017AEG 242.48 241.10 258.54 183.81 223.55 354.05 371.06 396.43 424.41Change in R.I 242.48 241.10 258.54 183.81 223.55 354.05 371.06 396.43 424.41

112

DRIP income for each forecasted year. Afterward our benchmark, or normal

earnings, is calculated by multiplying the previous year’s earnings by one plus

the company’s cost of equity. This “benchmark” value is then used in computing

the abnormal earnings growth by taking the cumulative dividend income and

subtracting the benchmark earnings for the year. Then the AEG values had to

be discounted back to year one by simply multiplying the values by the present

value factor. By taking the sum of the AEG values we calculated a total AEG of

1633.99.

Furthermore, a perpetuity value for AEG must be calculated for the years

out to infinity. To do this a forecasted AEG value of 515 is used because it

follows the pattern of the AEG values. Now it is necessary to use the perpetuity

equation to calculate the continuing terminal value of the perpetuity. This

equation is as follows:

AEG Perpetuity = forecasted AEG/ (Ke - growth)

AEG Perpetuity = 515/ (.1222-growth)

The value of the perpetuity must then be brought back to year one which

is done by multiplying the AEG perpetuity by the present value factor of year ten.

It is then necessary to sum the discounted AEG perpetuity, the summed AEG

values, and the forecasted earnings for 2008. This sum is used in finding the

intrinsic value of equity by dividing it by the cost of equity.

The sensitivity analysis must then be done in order to realize whether the

company is fairly valued. To determine the share values it is necessary to find

the times consistent price. This is calculated using this formula:

Times Consistent Price = Value of Equity x ((1+ Ke)^(9/12))/ Shares Outstanding

113

The Times Consistent Price provides the estimated value of the share at a given

cost of equity and growth rate. The results show Lowe’s to be slightly

overvalued at a cost of equity equal to 12.22% with a -10% growth rate.

However, by increasing the cost of equity to 13% or 14% Lowe’s is fairly valued

at all of the growth rates tested. The results of the sensitivity analysis show that

if Lowe’s could increase their cost of equity to 13% or 14% a fairly valued

company is possible using negative growth rates. The results also show that the

AEG valuation is less sensitive than other models to changes in the growth rate

and cost of equity.

As mentioned earlier the yearly AEG values must match the change in the

residual income. To illustrate this further, the value of AEG in year 2 must equal

RI in year 2 minus RI in year 1. However, this is not the only link between these

two models. The models should also share similar results on the sensitivity

analysis. The results for the two valuations for Lowe’s share similar results

because the estimated share prices are very close.

114

Credit Analysis

The Altman Z-score model is a measure that reflects the credit worthiness

of a public firm. “The model predicts bankruptcy when Z<1.81, and the range

between 1.81 and 2.67 is labeled the gray area” (Palepu). Therefore, a company

would be considered to have a low chance of bankruptcy and credit risk if Z>3.

The Altman Z-score is produced by using the formula:

1.2 (Working Capital/Total Assets) + 1.4 (Retained Earnings/ Total Assets) +

3.3 (EBIT/Total Assets) + .6 (Market Value of Equity/Total Liabilities) + 1.0

(Sales/ Total Assets)

The following shows the Altman Z-score in respect to Lowe’s:

Altman Z-score

2002 2003 2004 2005 2006

Z-Score 5.43 6.33 8.33 8.85 5.47

The Altman Z-score shows that Lowe’s is currently operating at 5.47. This

is a decrease compared to the previous three years of 6.33 to 8.85, but they are

still in good standing with respect to bankers. The main cause being the

decrease in Market Value of Equity/Total Liabilities, which explains the measure

of market leverage. This number fell due to a stock split in 2006 decreasing the

closing price per share.

115

Analysis of Valuations

There are many ways to value a firm by producing different models to

come up with a share price. These methods are pertinent for an investor to be

financially sound with their decision of a company’s position and future. By

coming up with a share price of our own (using the valuation methods), we are

able to observe whether a firm is overvalued, undervalued, or fairly valued. The

method of comparables and intrinsic valuations are the two models we will use

to produce a manipulated share price. The first of the two, the method of

comparables, uses a set of ratios that help weigh share price compared to the

industry average. Although this method is great at giving a quick glance at share

price compared to the industry, it is not always the most reliable valuation. The

second valuation model is the intrinsic valuations. These are more accurate in

evaluating the firm due to the use of extensive forecasts and prior years’ figures.

Method of Comparables

The method of comparables values a firm by finding a share price by

comparing the company’s ratios in relation to the industry average. This method

uses multiple ratios to determine a value of a firm which include: Trailing &

Forecasted Price to Earnings (P/E), Price to Book (P/B), Dividend Yield (D/P),

Price Earnings Growth (P.E.G.), Price over EBITDA (P/EBITDA), Price over Free

Cash Flow per Share (P/FCF), and Enterprise Value over EBITDA (EV/EBITDA).

When valuing Lowe’s, we found an industry average by using the competitors

Home Depot, Sherwin Williams, and Tractor Supply Co. Although, we had to

exclude Tractor Supply Co. from the industry average for dividend yield because

they do not pay out dividends, and from P/EBITDA and P/FCF due to being an

outlier from the industry ratios. The following is the application of these ratios

with respect to Lowe’s and its competitors.

116

Trailing Price to Earnings

The trailing price to earnings ratio is derived by dividing the current price

per share by the current earnings per share.

P/E (Trailing) Industry Average Lowe's Share Price

Lowe's 12.84 (26.15/2.036) 14.21 28.94

Home Depot 11.89

Sherwin Williams 13.48

Tractor Supply Co. 17.27 Current share price- $26.15

We found the trailing P/E ratio for Lowe’s and all of its competitors using

this ratio. Next, we took an industry average by summing each of the

competitors trailing P/E ratios and dividing by 3. Last, to find Lowe’s share price

we multiplied the industry average of 14.21 by Lowe’s current earnings per share

of 2.036. This gives us the share price of $28.94, which is closely related to the

November 1st share price of $26.15. Lowe’s, in conclusion, is fairly valued since

the observed share price is only undervalued by $2.79.

117

Forward Price to Earnings

This valuation ratio is different than the trailing P/E because it uses

forecasted earnings instead of current EPS. Therefore, we derive the forward P/E

by dividing current price per share by forecasted earnings per share.

P/E (Forward)

Industry Average

Lowe's Share Price

Lowe's 11.98 (26.15/2.183) 12.72 27.77

Home Depot 11.58

Sherwin Williams 12.12

Tractor Supply Co. 14.47 Current share price- $26.15

We found the forward P/E ratio for Lowe’s using the current price per

share (26.15) divided by our forecasted earnings per share (2.183). This

formula applies to our competitors as well; although, we used forecasted

earnings from yahoo finance for simplicity purposes. Next, as with the trailing

P/E ratio, we took an average the three competitors forward P/E to come up with

an industry average. We then multiplied this industry average with Lowe’s

forecasted EPS to get to a share price of $27.77. Again, this share price is fairly

valued with the observed share price of $26.15. It is slightly undervalued, but

$1.62 is a very minimal amount that would not infer that Lowe’s stock price is

severely understated.

118

Price to Book

The price to book method of comparables incorporates the price per share

and the book value of equity per share of a company.

P/B Industry Average Lowe's Share Price

Lowe's 2.39 (26.15/10.92) 3.5867 39.1664

Home Depot 2.76

Sherwin Williams 5.29

Tractor Supply Co. 2.71 Current share price- $26.15

First, the P/B ratios for the industry are found by dividing the price per

share (PPS) by the book value per share (BPS) for each company. Price per

share can be found on the latest financial reports while the BPS is found by

dividing the total stockholder’s equity by the number of shares outstanding. Once

the industry values are calculated it is necessary to find the industry average P/B

ratio. In the home improvement industry the average P/B ratio is 3.5867. This

number is then multiplied by Lowe’s BPS of 10.92 to find the estimated share

price. With a share price of $39.17 this method portrays Lowe’s as being

undervalued since their actual PPS is $26.15.

119

Dividend Yield

The dividend yield method is a ratio takes a look at dividends in relation to

share price. To compute this ratio, we use dividends per share divided by price

per share.

D/P Industry Average Lowe's Share Price

Lowe's .0099 (.26/26.15) 0.025 10.52

Home Depot 0.02933

Sherwin Williams 0.02010

Tractor Supply Co. N/A Current share price- $26.15

We computed this for Lowe’s, and the other competing firms. Although,

we excluded Tractor Supply Co. because they do not pay out dividends.

Therefore, the industry average is derived by adding Home Depot and Sherwin

Williams D/P and dividing by 2. We then computed Lowe’s share price by taking

Lowe’s dividends per share (.26), and divide this by the industry average (.025).

This gave us a share price of $10.52; which explains that Lowe’s (using the

dividend yield method) is extremely overvalued compared to its observed share

price of $26.15. It seems that the industry average is quite consistent due to

Home Depot and Sherwin Williams D/P being similar, but dividend yields are so

noisy in the marketplace it is hard to draw a clear conclusion to the value of a

firm. Even if Lowe’s grew its dividends per share to .52 (double the original

DPS), using the same industry average, its share price would still be a low value

of $20.80. This price would still explain the observed share price to be

overstated, and it would be very uncharacteristic for Lowe’s to increase dividends

by this much. In conclusion, this method does not do a great job in explaining

the value of a firm due to such noise in the market with respect to dividends.

120

Price Earnings Growth

PEG Ratio Industry Average LOW PPS

LOW 0.83 0.96 $30.36

HD 0.98

SHW 0.93

TSCO 0.97 Current share price- $26.15

The PEG ratio is a step up from the P/E ratio because the PEG also

accounts for the earnings growth of the companies. To calculate the PEG ratio

we took the companies P/E ratio that we calculated above as 12.82 and divided

by the estimated earnings growth rate of 15.5% to get 0.83 for Lowe’s. To get

the share price for Lowe’s we took the average of the PEG ratios of their

competitors, which were found on Yahoo Finance, and multiplied that by the

estimated earnings growth rate, and then multiplied that by our EPS to get

$30.36. According to the PEG ratio Lowe’s is slightly undervalued which means

that the price of Lowe’s stock per share is lower than the PEG ratio projects it to

be at on November 1, 2007. This matches the PEG ratio of Lowe’s because

Lowe’s has the lowest PEG of the competition and that should translate into an

undervalued company.

121

P/EBITDA

P/EBITDA Industry Average LOW PPS

LOW 6.31592 6.083 25.18

HD 5.05025

SHW 7.11503

TSCO 7.62620 Current share price- $26.15

This ratio is found by taking the price of the companies share multiplying

by the number of shares outstanding and dividing it by EBITDA, which is

earnings before interest, taxes, depreciation, and amortization. The reason we

multiplied by the shares outstanding was to get a more accurate ratio due to the

fact that Lowe’s and Home Depot acquire more earnings than Sherwin William’s

and Tractor Supply. To get Lowe’s EBITDA we took the net earnings and added

interest expense, tax expense, and depreciation expense to get $6314. Lowe’s

has no amortization so it was not included.

P/EBITDA=($26.15*1525)/$6314=6.31592

To get Lowe’s share price we multiplied Lowe’s EBITDA by the industry

average and then divided by the number of shares outstanding to get $25.18.

This estimated share price is very close to the observed share price of $26.15

and is therefore fairly valued.

Price/Free Cash Flows

P/FCF Industry Average LOW PPS LOW 0.03323 0.087 68.67 HD 0.00684 SHW 0.16767 TSCO (outlier) 4.817

Observed share price- $26.15

122

The price/free cash flow ratio is found by dividing the price per share of

each company by the free cash flow of each company. Free cash flow is the

cash flow from operating activities +/- cash flow from investing activities. For

Lowe’s we used the November 1, 2007 price of $26.15 and divided it by the

CFFO+-CFFI, which came out to 4502-3715=787, giving us a P/FCF ratio of

0.03323. The free cash flows and share prices were found on Yahoo Finance to

find the ratios of Lowe’s competitors in the industry. To get the share price of

Lowe’s we took the industry average of the P/FCF ratios, once again excluding

Tractor Supply because of their ratio being extremely different from the rest of

the industry, and multiplied it by Lowe’s free cash flow. Tractor Supply’s free

cash flow is smaller than the other three competitors in the industry because of

their size compared to the others; since they are smaller they have less cash

flowing through their company. Lowe’s share price came out to $68.87 being

undervalued.

EV/EBITDA

EV/EBITDA Industry Average LOW PPS LOW 4.34 7.354 22.79 HD 5.844 SHW 8.250 TSCO 7.968

Observed share price- $26.15

The EV/EBITDA ratio is found by taking the enterprise value of a company

and dividing it by the earnings before income, tax, interest, depreciation, and

amortization. The enterprise value of a company is the market value of equity +

total liabilities – cash and cash equivalents. The EV for Lowe’s equals:

15,725 + 12,042 – 364 = 27,403

123

We then divide this number by the EBITDA number we got in the above

P/EBITDA ratio of 6314, and we get a EV/EBITDA ratio of 4.34. The way we get

the share price for Lowe’s is similar to the other valuations. We took the

industry average of Lowe’s competitors found on Yahoo Finance and multiplied

that by Lowe’s EBITDA OF 6314. After this we subtracted Lowe’s liabilities and

added its cash and cash equivalents. Divide this number by the number of

shares outstanding for Lowe’s, 1525, and we got a share price of 22.79. This

value differs from most of the other valuation ratios as it is within 20% of the

observed share price and is fairly valued.

Conclusion

Overall, Lowe’s seems to be a fairly valued firm with respect to the

method of comparables model. Below are the ratios for this model that give

estimated price per share compared with industry averages, and their rank from

most to least reliable with consideration to each deviation from the observed

share price.

Price St. Dev. From observed share price Overvalued/Undervalued

P/EBITDA 25.18 0.686 Fairly Valued Forward P/E 27.77 1.146 Fairly Valued Trailing P/E 28.95 1.980 Fairly Valued EV/EBITDA 22.79 2.376 Fairly Valued P.E.G. 30.36 2.977 Fairly Valued P/B 39.17 9.207 Undervalued D/P 10.52 11.052 Overvalued P/FCF 68.67 30.066 Undervalued

124

As mentioned before, Lowe’s is a fairly valued using this method of

comparables. We determine our stock price to be in a fair range if it is within

20% of the observed share price. In our observations, we have determined that

D/P and P/FCF are not relevant in valuing Lowe’s. As mentioned before, the

dividend yield does not do a great job in valuing Lowe’s because dividends are

very noisy in the market place, as held true for the home improvement retail

industry. Also, the P/FCF did not do Lowe’s any justice with their estimated stock

price because Home Depot and Lowe’s are much larger firms when dealing with

cash flows. Therefore, the industry averages become substandard. All things

considered, Lowe’s seems to be fairly valued using the method of comparables,

but we must look further to the intrinsic values for Lowe’s to come to a more

reliable conclusion.

125

Appendix

Liquidity Ratios

Current Ratio

2002 2003 2004 2005 2006

Lowe's 1.56 1.55 1.22 1.34 1.27

Home Depot 1.48 1.4 1.35 1.2 1.39

Sherwin Williams 1.39 3.19 1.17 1.22 1.18

Tractor Supply 1.73 1.9 1.9 1.83 2.58 Quick Asset Ratio

2002 2003 2004 2005 2006

Lowe's 0.36 0.42 0.14 0.15 0.12

Home Depot 0.41 0.41 0.35 0.25 0.3

Sherwin Williams 0.61 0.73 0.51 0.54 0.65

Tractor Supply 0.092 0.12 0.13 0.07 0.14

Accounts Receivable Turnover

2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6

L o w e ' s 1 5 1 .81 2 1 1 .2 2 N /A N /A N /A

H o m e D e p o t 5 4 .33 59 .0 8 4 8 .7 6 34 .0 2 2 8 .18

S h e r w in - W i l l ia m s 1 0 .52 9 . 9 4 8 .4 4 8 .8 9 9 .02

T r a c t o r S u p p ly 1 1 .85 N /A N /A N /A N /A

Days sales outstanding

2002 2003 2004 2005 2006

Lowe's 2.4 1.73 N/A N/A N/A

Home Depot 6.72 6.18 7.49 10.73 12.95

Sherwin-Williams 34.7 36.72 43.25 41.06 40.47

Tractor Supply 30.8 N/A N/A N/A N/A

Inventory Turnover

2002 2003 2004 2005 2006

Lowe's 4.58 4.64 4.05 4.29 4.3

Home Depot 4.82 4.87 4.83 4.75 4.76

Sherwin Williams 4.55 4.63 4.42 5.03 5.33

Tractor Supply 3 3.16 3.15 3.1 2.73

Days supply of inventory

2002 2003 2004 2005 2006

Lowe's 79.69 78.66 90.12 85.08 84.88

Home Depot 75.73 74.95 75.57 76.84 76.68

Sherwin Williams 80.22 78.83 82.58 72.56 68.48

Tractor Supply 121.67 115.51 115.87 117.74 133.7

126

Working capital turnover

Profitability Ratios Operating Profit Margin

2002 2003 2004 2005 2006Lowe's 9.08% 9.55% 9.65% 10.40% 10.65%Home Depot 10.01% 10.56% 10.84% 11.49% 10.65%Sherwin Williams 9.59% 9.67% 9.49% 9.13% 10.68%Tractor Supply 5.33% 6.50% 5.84% 6.60% 6.25% Net Profit Margin

2002 2003 2004 2005 2006Lowe's 5.66% 5.93% 5.94% 6.39% 6.62%Home Depot 6.29% 6.64% 6.84% 7.16% 6.34%Sherwin Williams 2.46% 6.14% 6.43% 6.44% 7.38%Tractor Supply 3.15% 3.78% 3.68% 4.14% 3.84%

2002 2003 2004 2005 2006Lowe's 30.00% 31.03% 33.57% 34.20% 34.52%Home Depot 31.0% 32.0% 33.0% 34.0% 33.0%Sherwin Williams 45.10% 45.40% 44.19% 42.84% 43.72%Tractor Supply 28.28% 30.48% 30.17% 30.93% 31.71%

2002 2003 2004 2005 2006Lowe's 30.00% 31.03% 33.57% 34.20% 34.52%Home Depot 31.0% 32.0% 33.0% 34.0% 33.0%Sherwin Williams 45.10% 45.40% 44.19% 42.84% 43.72%Tractor Supply 28.28% 30.48% 30.17% 30.93% 31.71%

2002 2003 2004 2005 2006Lowe's 30.00% 31.03% 33.57% 34.20% 34.52%Home Depot 31.0% 32.0% 33.0% 34.0% 33.0%Sherwin Williams 45.10% 45.40% 44.19% 42.84% 43.72%Tractor Supply 28.28% 30.48% 30.17% 30.93% 31.71%

127

Asset Turnover

2002 2003 2004 2005 2006

Lowe's 1.62 1.64 1.72 1.76 1.69

Home Depot

1.94

1.88

1.88

1.84

1.74

Sherwin Williams 1.51 1.47 1.43 1.65 1.56

Tractor Supply 2.64 2.74 2.56 2.54 2.35 Return on Assets

2002 2003 2004 2005 2006

Lowe's 10.20% 11.40% 11.55% 13.03% 12.60%Home Depot 12.81% 14.34% 14.52% 15.01% 12.97%Sherwin Williams 4.22% 9.02% 10.68% 10.84% 13.18%Tractor Supply 9.57% 12.14% 11.90% 12.63% 11.17%

Return on Equity

2002 2003 2004 2005 2006 Lowe's 21.10% 22.03% 21.21% 23.97% 21.72% Home Depot 22.14% 21.74% 22.32% 24.17% 21.41% Sherwin Williams 10.35% 24.75% 26.96% 28.12% 33.29% Tractor Supply 19.16% 24.44% 22.02% 23.12% 19.05%

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Working Capital Ratios Debt to Equity

2002 2003 2004 2005 2006

Lowe's 0.94 0.84 0.84 0.72 0.77

Home Depot 0.52 0.54 0.61 0.65 1.09 Sherwin williams 1.56 1.52 1.59 1.52 1.51

Tractor Supply 1.01 0.85 0.83 0.71 0.68 Times Interest Earned

2002 2003 2004 2005 2006 Lowe's 14.03 17.36 21.00 29.46 33.45 Home Depot 157.58 110.42 113.23 65.48 24.68 Sherwin Williams 13.28 14.50 15.52 14.23 13.42 Tractor Supply 13.7 27.78 70.52 83.61 55.07 Debt Service Margin

2002 2003 2004 2005 2006

Lowe's 51.41 104.62 39.91 6.10 140.69

Home Depot N/A 935.00 13.03 601.82 14.93 Sherwin williams 37.26 37.26 51.40 63.91 77.75

Tractor Supply N/A 187.96 227.33 112.45 83.07

129

Regression Analysis

3 month Regression Analysis

72 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.353167771R Square 0.124727474Adjusted R Square 0.112223581Standard Error 0.093857661Observations 72

ANOVAdf SS MS F Significance F

Regression 1 0.087873177 0.087873177 9.97509112 0.002342427Residual 70 0.61664824 0.008809261Total 71 0.704521417

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 7.28651E-05 0.011121853 0.006551522 0.994791315 -0.022108972 0.022254702 -0.022108972 0.022254702X Variable 1 1.011857834 0.320376803 3.158336765 0.002342427 0.372886458 1.650829211 0.372886458 1.650829211

Observations Beta T Stat Adjusted R^272 1.01 3.15 0.1160 1.06 2.54 0.0848 1.24 1.95 0.0636 1.47 1.8 0.0624 1.28 1 0

60 months

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.316012636R Square 0.099863986Adjusted R Square 0.0843444Standard Error 0.091819359Observations 60

ANOVAdf SS MS F Significance F

Regression 1 0.054249691 0.054249691 6.434706663 0.013904483Residual 58 0.488986092 0.008430795Total 59 0.543235782

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.008519342 0.012308635 -0.692143556 0.491608937 -0.033157752 0.016119067 -0.033157752 0.016119067X Variable 1 1.157430946 0.456279244 2.53667236 0.013904483 0.244088814 2.070773079 0.244088814 2.070773079

130

48 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.27578058R Square 0.076054928Adjusted R Square 0.055969166Standard Error 0.093473316Observations 48

ANOVAdf SS MS F Significance F

Regression 1 0.03308372 0.03308372 3.786509408 0.05779178Residual 46 0.401913995 0.008737261Total 47 0.434997716

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.015269925 0.013947623 -1.094804828 0.279301633 -0.043345033 0.012805183 -0.043345033 0.012805183X Variable 1 1.240926335 0.637714778 1.945895529 0.05779178 -0.042726915 2.524579584 -0.042726915 2.524579584

36 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.294775194R Square 0.086892415Adjusted R Square 0.060036309Standard Error 0.104499611Observations 36

ANOVAdf SS MS F Significance F

Regression 1 0.035331997 0.035331997 3.235480844 0.080941952Residual 34 0.371285738 0.010920169Total 35 0.406617735

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.018558004 0.018007245 -1.030585396 0.310011098 -0.055153128 0.018037121 -0.055153128 0.018037121X Variable 1 1.468312114 0.816298438 1.798744241 0.080941952 -0.190605895 3.127230124 -0.190605895 3.127230124

24 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.209803103R Square 0.044017342Adjusted R Square 0.000563585Standard Error 0.124533974Observations 24

ANOVAdf SS MS F Significance F

Regression 1 0.015709855 0.015709855 1.012969765 0.325134718Residual 22 0.341191636 0.015508711Total 23 0.356901491

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.028166313 0.026790825 -1.051341757 0.304513403 -0.083727084 0.027394457 -0.083727084 0.027394457X Variable 1 1.277173599 1.268970982 1.006463991 0.325134718 -1.354511132 3.90885833 -1.354511132 3.90885833

131

1 Year Regression Analysis

72 months

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.353175525R Square 0.124732952Adjusted R Square 0.112229137Standard Error 0.093857368Observations 72

ANOVAdf SS MS F Significance F

Regression 1 0.087877036 0.087877036 9.975591611 0.002341871Residual 70 0.616644381 0.008809205Total 71 0.704521417

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000310063 0.011114237 0.027897835 0.977823019 -0.021856582 0.022476709 -0.021856582 0.022476709X Variable 1 1.010359483 0.319894366 3.158415997 0.002341871 0.372350296 1.64836867 0.372350296 1.64836867

Observations Beta T Stat Adjusted R^272 1.01 3.16 0.1160 1.16 2.54 0.0848 1.24 1.95 0.0636 1.47 1.8 0.0624 1.28 1.01 0

60 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.316135987R Square 0.099941963Adjusted R Square 0.084423721Standard Error 0.091815382Observations 60

ANOVAdf SS MS F Significance F

Regression 1 0.05429205 0.05429205 6.440288944 0.013865307Residual 58 0.488943732 0.008430064Total 59 0.543235782

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.008271216 0.012281792 -0.673453507 0.503333713 -0.032855892 0.016313461 -0.032855892 0.016313461X Variable 1 1.15648518 0.455708779 2.537772437 0.013865307 0.244284956 2.068685404 0.244284956 2.068685404

132

48 months

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.275714858R Square 0.076018683Adjusted R Square 0.055932133Standard Error 0.093475149Observations 48

ANOVAdf SS MS F Significance F

Regression 1 0.033067954 0.033067954 3.78455642 0.057853878Residual 46 0.401929762 0.008737604Total 47 0.434997716

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.014980041 0.013911061 -1.076843832 0.28716525 -0.042981554 0.013021473 -0.042981554 0.013021473X Variable 1 1.239203115 0.636993505 1.945393641 0.057853878 -0.042998288 2.521404519 -0.042998288 2.521404519

36 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.294934104R Square 0.086986126Adjusted R Square 0.060132777Standard Error 0.104494249Observations 36

ANOVAdf SS MS F Significance F

Regression 1 0.035370101 0.035370101 3.239302665 0.080770701Residual 34 0.371247634 0.010919048Total 35 0.406617735

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.018305823 0.017970632 -1.018652125 0.31556223 -0.054826541 0.018214896 -0.054826541 0.018214896X Variable 1 1.467626931 0.815436052 1.799806285 0.080770701 -0.189538498 3.124792361 -0.189538498 3.124792361

24 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.21115249R Square 0.044585374Adjusted R Square 0.001157437Standard Error 0.124496971Observations 24

ANOVAdf SS MS F Significance F

Regression 1 0.015912587 0.015912587 1.026651892 0.321961016Residual 22 0.340988905 0.015499496Total 23 0.356901491

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.0281116 0.026748949 -1.050942211 0.304692809 -0.083585525 0.027362325 -0.083585525 0.027362325X Variable 1 1.284352851 1.267572324 1.013238319 0.321961016 -1.34443124 3.913136942 -1.34443124 3.913136942

133

2 Year Regression Analysis

72 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.352128429R Square 0.123994431Adjusted R Square 0.111480066Standard Error 0.093896956Observations 72

ANOVAdf SS MS F Significance F

Regression 1 0.087356732 0.087356732 9.908167781 0.00241807Residual 70 0.617164685 0.008816638Total 71 0.704521417

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000561812 0.011111698 0.050560454 0.959819773 -0.021599769 0.022723394 -0.021599769 0.022723394X Variable 1 1.005365326 0.319394348 3.147724223 0.00241807 0.368353393 1.642377258 0.368353393 1.642377258

Observations Beta T Stat Adjusted R^272 1.01 3.14 0.1160 1.15 2.53 0.0848 1.23 1.94 0.0636 1.46 1.8 0.0624 1.29 1.02 0

60 months

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.31535997R Square 0.099451911Adjusted R Square 0.08392522Standard Error 0.091840374Observations 60

ANOVAdf SS MS F Significance F

Regression 1 0.054025837 0.054025837 6.405222443 0.014113359Residual 58 0.489209946 0.008434654Total 59 0.543235782

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.008059096 0.012265481 -0.657055065 0.513744436 -0.032611123 0.016492931 -0.032611123 0.016492931X Variable 1 1.153092493 0.455613975 2.530854094 0.014113359 0.241082041 2.065102946 0.241082041 2.065102946

48 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.274983581R Square 0.07561597Adjusted R Square 0.055520665Standard Error 0.093495517Observations 48

ANOVAdf SS MS F Significance F

Regression 1 0.032892774 0.032892774 3.762867479 0.058548447Residual 46 0.402104942 0.008741412Total 47 0.434997716

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.014796236 0.013893454 -1.064978881 0.292443831 -0.042762309 0.013169837 -0.042762309 0.013169837X Variable 1 1.23467077 0.636490176 1.939811197 0.058548447 -0.046517484 2.515859024 -0.046517484 2.515859024

134

36 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.29423675R Square 0.086575265Adjusted R Square 0.059709832Standard Error 0.104517758Observations 36

ANOVAdf SS MS F Significance F

Regression 1 0.035203038 0.035203038 3.222552336 0.081524304Residual 34 0.371414697 0.010923962Total 35 0.406617735

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.018246007 0.017969063 -1.015412296 0.317081039 -0.054763536 0.018271522 -0.054763536 0.018271522X Variable 1 1.462100576 0.814474063 1.795146884 0.081524304 -0.193109857 3.117311009 -0.193109857 3.117311009

24 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.211757772R Square 0.044841354Adjusted R Square 0.001425052Standard Error 0.124480291Observations 24

ANOVAdf SS MS F Significance F

Regression 1 0.016003946 0.016003946 1.032822973 0.320543549Residual 22 0.340897545 0.015495343Total 23 0.356901491

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.028242875 0.026778421 -1.054687872 0.303013858 -0.08377792 0.02729217 -0.08377792 0.02729217X Variable 1 1.285846108 1.265249138 1.016278984 0.320543549 -1.338119991 3.909812208 -1.338119991 3.909812208

135

5 Year Regression Analysis

72 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.349641643R Square 0.122249279Adjusted R Square 0.109709983Standard Error 0.093990439Observations 72

ANOVAdf SS MS F Significance F

Regression 1 0.086127235 0.086127235 9.749293613 0.002608007Residual 70 0.618394182 0.008834203Total 71 0.704521417

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.001135965 0.011108121 0.102264389 0.918839208 -0.021018483 0.023290414 -0.021018483 0.023290414X Variable 1 0.997320221 0.319409662 3.122385885 0.002608007 0.360277745 1.634362698 0.360277745 1.634362698

Observations Beta T Stat Adjusted R^272 1 3.12 0.1160 1.15 2.51 0.0848 1.23 1.93 0.0636 1.46 1.79 0.0624 1.29 1.02 0

60 months

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.313031207R Square 0.097988537Adjusted R Square 0.082436615Standard Error 0.091914963Observations 60

ANOVAdf SS MS F Significance F

Regression 1 0.053230879 0.053230879 6.300734929 0.014880765Residual 58 0.490004903 0.00844836Total 59 0.543235782

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.007484714 0.012224449 -0.612274166 0.542749412 -0.031954607 0.016985179 -0.031954607 0.016985179X Variable 1 1.146234849 0.456644261 2.510126477 0.014880765 0.232162056 2.060307642 0.232162056 2.060307642

48 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.274009427R Square 0.075081166Adjusted R Square 0.054974235Standard Error 0.093522559Observations 48

ANOVAdf SS MS F Significance F

Regression 1 0.032660136 0.032660136 3.734093749 0.059484085Residual 46 0.40233758 0.008746469Total 47 0.434997716

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.014386235 0.01385118 -1.038628796 0.304406234 -0.042267215 0.013494745 -0.042267215 0.013494745X Variable 1 1.230286084 0.636668705 1.932380332 0.059484085 -0.05126153 2.511833699 -0.05126153 2.511833699

136

36 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.293540455R Square 0.086165999Adjusted R Square 0.059288528Standard Error 0.10454117Observations 36

ANOVAdf SS MS F Significance F

Regression 1 0.035036623 0.035036623 3.20588199 0.082282187Residual 34 0.371581112 0.010928856Total 35 0.406617735

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.018114234 0.017957699 -1.008716859 0.320235659 -0.05460867 0.018380202 -0.05460867 0.018380202X Variable 1 1.459096992 0.814911406 1.790497693 0.082282187 -0.197002228 3.115196213 -0.197002228 3.115196213

24 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.211743423R Square 0.044835277Adjusted R Square 0.001418699Standard Error 0.124480687Observations 24

ANOVAdf SS MS F Significance F

Regression 1 0.016001777 0.016001777 1.032676429 0.32057711Residual 22 0.340899714 0.015495442Total 23 0.356901491

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.028281285 0.026790642 -1.055640451 0.302587926 -0.083841676 0.027279105 -0.083841676 0.027279105X Variable 1 1.285714993 1.265209884 1.016206883 0.32057711 -1.3381697 3.909599685 -1.3381697 3.909599685

7 Year Regression Analysis

72 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.34875436R Square 0.121629603Adjusted R Square 0.109081455Standard Error 0.094023611Observations 72

ANOVAdf SS MS F Significance F

Regression 1 0.085690661 0.085690661 9.693031854 0.002678939Residual 70 0.618830757 0.008840439Total 71 0.704521417

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.001383279 0.011106514 0.12454666 0.901239429 -0.020767965 0.023534523 -0.020767965 0.023534523X Variable 1 0.994609554 0.319464648 3.113363431 0.002678939 0.357457411 1.631761696 0.357457411 1.631761696

Observations Beta T Stat Adj. R^272 1 3.11 0.1160 1.14 2.5 0.0848 1.23 1.93 0.0636 1.46 1.79 0.0624 1.29 1.02 0

137

60 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.312023198R Square 0.097358476Adjusted R Square 0.081795691Standard Error 0.091947059Observations 60

ANOVAdf SS MS F Significance F

Regression 1 0.052888608 0.052888608 6.25585181 0.01522388Residual 58 0.490347175 0.008454262Total 59 0.543235782

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.007219546 0.01220588 -0.591480984 0.556496599 -0.031652269 0.017213177 -0.031652269 0.017213177X Variable 1 1.143172202 0.457054963 2.501170088 0.01522388 0.228277299 2.058067105 0.228277299 2.058067105

48 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.273477304R Square 0.074789836Adjusted R Square 0.054676571Standard Error 0.093537287Observations 48

ANOVAdf SS MS F Significance F

Regression 1 0.032533408 0.032533408 3.718433479 0.060000212Residual 46 0.402464308 0.008749224Total 47 0.434997716

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.014191055 0.013832342 -1.02593294 0.310288111 -0.042034114 0.013652004 -0.042034114 0.013652004X Variable 1 1.227990179 0.636817347 1.928324008 0.060000212 -0.053856636 2.509836995 -0.053856636 2.509836995

36 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.293186868R Square 0.085958539Adjusted R Square 0.059074967Standard Error 0.104553036Observations 36

ANOVAdf SS MS F Significance F

Regression 1 0.034952267 0.034952267 3.197437387 0.082669132Residual 34 0.371665468 0.010931337Total 35 0.406617735

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.018011652 0.01794719 -1.003591771 0.322664831 -0.054484731 0.018461426 -0.054484731 0.018461426X Variable 1 1.457833075 0.815279974 1.788137966 0.082669132 -0.199015167 3.114681317 -0.199015167 3.114681317

24 months

138

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.211637996R Square 0.044790641Adjusted R Square 0.001372034Standard Error 0.124483596Observations 24

ANOVAdf SS MS F Significance F

Regression 1 0.015985847 0.015985847 1.031600142 0.320823744Residual 22 0.340915645 0.015496166Total 23 0.356901491

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.0282524 0.026783605 -1.054839346 0.3029461 -0.083798197 0.027293396 -0.083798197 0.027293396X Variable 1 1.2853345 1.265495101 1.015677184 0.320823744 -1.339141694 3.909810695 -1.339141694 3.909810695

10 Year Regression Analysis

72 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.348163885R Square 0.121218091Adjusted R Square 0.108664064Standard Error 0.094045633Observations 72

ANOVAdf SS MS F Significance F

Regression 1 0.085400741 0.085400741 9.655713519 0.002727095Residual 70 0.619120676 0.008844581Total 71 0.704521417

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.001592964 0.011104809 0.143448146 0.886348409 -0.020554879 0.023740807 -0.020554879 0.023740807X Variable 1 0.993142229 0.319609193 3.107364401 0.002727095 0.355701801 1.630582657 0.355701801 1.630582657

Observation Beta T Stat Adjusted R^272 0.99 3.11 0.1160 1.14 2.49 0.0848 1.23 1.92 0.0536 1.46 1.79 0.0624 1.29 1.02 0

60 months

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.311085049R Square 0.096773908Adjusted R Square 0.081201044Standard Error 0.091976827Observations 60

ANOVAdf SS MS F Significance F

Regression 1 0.052571049 0.052571049 6.214265394 0.015549287Residual 58 0.490664733 0.008459737Total 59 0.543235782

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.006968732 0.012188727 -0.57173585 0.569710171 -0.03136712 0.017429656 -0.03136712 0.017429656X Variable 1 1.140408339 0.45747302 2.492842834 0.015549287 0.224676604 2.056140073 0.224676604 2.056140073

139

48 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.272957694R Square 0.074505903Adjusted R Square 0.054386466Standard Error 0.093551639Observations 48

ANOVAdf SS MS F Significance F

Regression 1 0.032409897 0.032409897 3.703180317 0.06050766Residual 46 0.402587818 0.008751909Total 47 0.434997716

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.013985782 0.013812852 -1.012519474 0.31658613 -0.041789611 0.013818047 -0.041789611 0.013818047X Variable 1 1.225709986 0.636942597 1.924364913 0.06050766 -0.056388945 2.507808917 -0.056388945 2.507808917

36 months SUMMARY OUTPUT

Regression StatisticsMultiple R 0.292791588R Square 0.085726914Adjusted R Square 0.058836529Standard Error 0.104566282Observations 36

ANOVAdf SS MS F Significance F

Regression 1 0.034858084 0.034858084 3.188013646 0.083103369Residual 34 0.371759651 0.010934107Total 35 0.406617735

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.017878383 0.017933111 -0.996948187 0.325832375 -0.05432285 0.018566084 -0.05432285 0.018566084X Variable 1 1.456340916 0.815648357 1.785500951 0.083103369 -0.201255969 3.113937801 -0.201255969 3.113937801

24 months

SUMMARY OUTPUT

Regression StatisticsMultiple R 0.21152419R Square 0.044742483Adjusted R Square 0.001321687Standard Error 0.124486734Observations 24

ANOVAdf SS MS F Significance F

Regression 1 0.015968659 0.015968659 1.030439029 0.321090108Residual 22 0.340932832 0.015496947Total 23 0.356901491

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept -0.028193084 0.026767297 -1.053266024 0.30365041 -0.08370506 0.027318892 -0.08370506 0.027318892X Variable 1 1.285139295 1.266015588 1.015105428 0.321090108 -1.340416324 3.910694914 -1.340416324 3.910694914

140

Cost of Equity

10 Year Rate Observation Beta T Stat Adjusted R^2 72 0.99 3.11 0.11 60 1.14 2.49 0.08 48 1.23 1.92 0.05 36 1.46 1.79 0.06 24 1.29 1.02 0 7 Year Rate Observations Beta T Stat Adj. R^2 72 1 3.11 0.11 60 1.14 2.5 0.08 48 1.23 1.93 0.06 36 1.46 1.79 0.06 24 1.29 1.02 0 5 Year Rate Observations Beta T Stat Adjusted R^2

72 1 3.12 0.11 60 1.15 2.51 0.08 48 1.23 1.93 0.06 36 1.46 1.79 0.06 24 1.29 1.02 0

2 Year Rate Observations Beta T Stat Adjusted R^2 72 1.01 3.14 0.11 60 1.15 2.53 0.08 48 1.23 1.94 0.06 36 1.46 1.8 0.06 24 1.29 1.02 0 1 Year Rate Observations Beta T Stat Adjusted R^2 72 1.01 3.16 0.11 60 1.16 2.54 0.08 48 1.24 1.95 0.06 36 1.47 1.8 0.06 24 1.28 1.01 0

141

3 Month Rate Observations Beta T Stat Adjusted R^2 72 1.01 3.15 0.11 60 1.06 2.54 0.08 48 1.24 1.95 0.06 36 1.47 1.8 0.06 24 1.28 1 0

Cost of Debt and WACC

Weight Rate Value Weighted Rate

Current maturities of long-term debt 88 0.0073077 0.054 0.0395%Accounts Payable 3524 0.2926424 0.054 1.5803%

Other Current Liabilities 1151 0.09558212 0.054 0.5161%

Long Term Debt 4325 0.3591596 0.0724 2.6634%Other Long-term Liabilities 443 0.03678791 0.0724 0.26634%

Total Liabilities 12042

Kd=5.07%

WACCbt = 9.12%

WACCat= 8.35%

142

Discounted Dividends Model

0 1 2 3 4 5 6 7 8 9 10

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

DPS (Dividends Per Share) 0.26 0.31 0.36 0.42 0.47 0.52 0.57 0.62 0.68 0.73 0.78

PV Factor 1.000 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460PV of Dividends Year by Year 0.840 0.771 0.707 0.649 0.595 0.546 0.501 0.460 0.422 0.387Total PV of Annual Dividends 5.876Continuing (Terminal) Value Perpetuity 28.000PV of Terminal Value Perpetuity 12.892Estimated Price per Share 18.768Time Consistent Price 20.021Observed Share Price 26.15Initial Cost of Equity 0.09Perpetuity Growth Rate (g) 0.06

gSensitivity Analysis 0 0.03 0.06 0.075

0.08 12.01 15.35 28.71 95.490.09 10.85 13.15 20.02 33.77

Ke 0.1 9.93 11.57 15.66 21.400.11 9.17 10.38 13.04 16.08

0.1222 8.41 9.28 10.97 12.63

Over Valued < $20.92Fairly Valued within 20%Under Valued > $31.38 Observed Price (as of No

143

Free Cash Flows Model

Free Cash Flows WACC (bt) 9.12% Kd 5.07% Ke 0.12222%

0 1 2 3 4 5 6 7 8 92007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Cash from Operations 4,502 4486 6160 7359 7673 8637 10002 12102 13865 15620Cash Investments -3,715 -3326 -3518 -3751 -4065 -4153 -4252 -4461 -4674 -4883Book Value of Debt and Preferred Stock 12,042

Annual Free Cash Flow 1160 2642 3608 3609 4484 5750 7641 9191 10737PV Factor 0.9164 0.8398 0.7696 0.7053 0.6464 0.5923 0.5428 0.4975 0.4559PV of Free Cash Flows 1063 2219 2777 2545 2898 3406 4148 4572 4895Total PV of Annual Free Cash Flows 33,851Continuing (Terminal) Value of PerpetuityPresent Value of Continuing (Terminal) Value 81,690 Sensitivity Analysis gValue of the Firm 115,541 0.01 0.02 0.03 0.04 0.05Book Value of Liabilities 12,042 0.085 81.37 91.4 105.07 124.83 155.87Estimated Market Value of Equity 103,499 0.0912 72.46 80.49 91.15 105.97 127.98Estimated Value per Share 67.87 0.1222 43.52 46.67 50.5 55.27 61.35Time Consistent Implied Share Price 72.46 0.15 29.23 30.82 32.68 34.87 37.5

0.18 19.6 20.44 21.4 22.49 23.75Observed Share Price 26.15 WACC btWACC bt 0.0912 Overvalued > 31.38Perpetuity Growth Rate (g) 0.01 Fair Valued within %20

Undervalued < 20.92

144

Residual Income Model

Fiscal Year ends February 2, 2007 WACC(BT)= 9.15% 9.12% Kd 5.07% Ke

change in RI 242.48 241.10 258.54 183.81 223.55 354.050 1 2 3 4 5 6 7

2007 2008 2009 2010 2011 2012 2013 2014Earnings 3,105$ 3,329$ 3,919$ 4,569$ 5,305$ 6,045$ 6,904$ 7,988$ Dividends 397$ 485$ 574$ 663$ 752$ 841$ 930$ 1,019$ Book Value Equity 15,725$ 18,569$ 21,913$ 25,819$ 30,371$ 35,575$ 41,550$ 48,519$

Actual Earnings 3,329$ 3,919$ 4,569$ 5,305$ 6,045$ 6,904$ 7,988$ "Normal" (Benchmark) Earnings 1,922$ 2,269$ 2,678$ 3,155$ 3,711$ 4,347$ 5,077$ Residual Income (Annual) 1,407$ 1,650$ 1,891$ 2,149$ 2,333$ 2,557$ 2,911$ PV Factor 0.891 0.794 0.708 0.631 0.562 0.501 0.446PV of Annual Residual Income 1,254$ 1,310$ 1,338$ 1,355$ 1,311$ 1,280$ 1,299$ Total PV of Annual Residual Income 13,051$ growth

Sensitivity Analysis -0.1 -0.2 -0.3PV of Terminal Value Perpetuity 6,607$ 0.1 30.73 28.63 27.57Initial Book Value of Equity 15,725$ Ke 0.11 28.12 26.34 25.42

0.1222 25.3 23.83 23.06Estimated Price per Share (end of 1987) 23.20$ 0.13 23.67 22.38 21.68Time Consistent Price 25.30$ 0.14 21.78 20.67 20.06Observed Share Price 26.15$ Initial Cost of Equity 12.22%Perpetuity Growth Rate (g) -10%

ROE 21.17% 21.10% 20.85% 20.55% 19.90% 19.41% 19.23%ROE growth -0.31% -1.21% -1.46% -3.13% -2.49% -0.93%

0.177224973 0.165816891 0.161053989 0.139528243 0.14218513 0.157026508 0.153069848

145

Long-Run Residual Income Model

Book Value of Equity 15725Long run ROE 18%Long Run Growth Rate in Equity -4.00%Cost of Equity 10.00%

Estimated Price Per Share 16.20$ Time consistent Price per Share 17.40$

Observed Share Price 26.15$

ROE0.17 0.18 0.19 0.2

0.1 17.81 18.77 19.73 20.69Ke 0.11 16.49 17.39 18.28 19.17

0.1222 15.15 15.97 16.79 17.610.13 14.41 15.19 15.97 16.75

g-0.01 -0.0152 -0.03 -0.04

0.17 15.31 15.15 14.77 14.56ROE 0.18 16.16 15.97 15.51 15.25

0.19 17.01 16.79 16.25 15.940.2 17.86 17.61 16.99 16.64

g-0.01 -0.0152 -0.03 -0.04

0.1 19.13 18.77 17.89 17.400.11 17.66 17.39 16.73 16.35

Ke 0.1222 16.16 15.97 15.51 15.250.13 15.34 15.19 14.83 14.63

146

Abnormal Earnings Growth

Abnormal Earnings Growth Model0 1 2 3 4 5 6 7 8 9 10

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Earnings 3329 3919 4569 5305 6045 6904 7988 9211 10598 12171 13980Dividends 485 574 663 752 841 930 1019 1107 1196 1285 1390Dividends invested at 12.2% Drip 59.31 70.17 81.03 91.89 102.75 113.61 124.46 135.32 146.18 157.04Cum-Dividend Earnings 3978.20 4638.87 5385.54 6136.53 7006.84 8101.83 9335.44 10733.00 12317.12 14137.10Normal Earnings 3735.71 4397.77 5127.00 5952.72 6783.30 7747.78 8964.39 10336.56 11892.71 13658.23Abnormal Earning Growth 242.48 241.10 258.54 183.81 223.55 354.05 371.06 396.43 424.41 478.87 PV Factor 0.8911 0.7941 0.7076 0.6305 0.5619 0.5007 0.4462 0.3976 0.3543 0.3157 PV of AEG 216.08 191.45 182.94 115.90 125.61 177.27 165.56 157.62 150.37 151.19 Residual Income Check Figure

Core Earnings 3328.92Total PV of AEG 1633.99Continuing Termial Value 2317.731773PV of Terminal Value 731.75Total PV of AEG 2365.73Total Average EPS Perp (t+1) 5694.65Capitalization Rate 0.1222

Intrinsic Value per Share 46601.09Times Consistent Price 33.32Shares Outstanding 1525Observed Share Price (11/1/07) 26.15 Sensitivity Analysis

-0.1 -0.2 -0.3 -0.40.1 48.49 46.16 44.99 44.29

Ke 0.11 40.69 38.90 37.98 37.420.122 33.32 32.09 31.29 30.950.13 29.53 28.42 27.83 27.460.14 25.47 24.59 24.11 23.80

147

Z – Score Analysis

2002 2003 2004 2005 2006

1.2 Working Capital/Total Assets 0.1235 0.1238 0.0592 0.0794 0.06391.4 Retained Earnings/Total Assets 0.3654 0.4039 0.4542 0.4948 0.53523.3 EBIT/Total Assets 0.3380 0.3066 0.1303 0.1604 0.1194 0.6 Market Value of Equity/Book Value of Liabilities 3.423691559 4.937768014 9.119342568 9.634187373 4.269037535

1 Sales/Total Assets 1.6210 1.6446 1.7193 1.7551 1.6900

2002 2003 2004 2005 2006Working Capital/Total Assets 0.15 0.15 0.07 0.10 0.08Retained Earnings/Total Assets 0.51 0.57 0.64 0.69 0.75EBIT/Total Assets 1.12 1.01 0.43 0.53 0.39Market Value of Equity/Book Value of Liabilities 2.05 2.96 5.47 5.78 2.56Sales/Total Assets 1.62 1.64 1.72 1.76 1.69Z-Score 5.45 6.33 8.33 8.85 5.47

Altman Z-score2002 2003 2004 2005 2006

Z-Score 5.43 6.33 8.33 8.85 5.47

148

Sales Diagnostic Ratios

2002 2003 2004 2005 2006Lowe'sNet Sales/Cash from sales 1 1 1 1 1Net Sales/Net Accounts Receivab 151.81 211.29 4051.55 N/A N/ANet Sales/Unearned Revenues N/A N/A 137.6 114.7 128.92Net Sales/Inventory 6.58 6.73 6.1 6.52 6.57Net Sales/Warranty Liabilities N/A N/A 424 209.92 148.97

Home DepotNet Sales/Cash from sales 1 1 1.01 1.01 1.01Net Sales/Net Accounts Receivab 54.33 59.08 48.76 34.02 28.18Net Sales/Unearned Revenues 58.36 50.59 47.28 46.39 55.59Net Sales/Inventory 6.99 7.14 7.25 7.15 7.08Net Sales/Warranty Liabilities N/A N/A N/A N/A N/A

Sherwin WilliamsNet Sales/Cash from sales 0.99 1.01 1.03 1.01 1.01Net Sales/Net Accounts Receivab 10.5 9.94 8.44 8.89 9.03Net Sales/Unearned Revenues N/A N/A N/A N/A N/ANet Sales/Inventory 8.3 8.47 7.91 8.89 9.46Net Sales/Warranty Liabilities 334.29 326.65 337.82 312.6 309.59

Tractor Supply CompanyNet Sales/Cash from sales 1 1 1 1 1Net Sales/Net Accounts Receivab11862.7 N/A N/A N/A N/ANet Sales/Unearned Revenues N/A N/A N/A N/A N/ANet Sales/Inventory 4.18 4.54 4.51 4.49 3.99Net Sales/Warranty Liabilities N/A N/A N/A N/A N/A

149

Core Expense Manipulation Diagnostics

2002 2003 2004 2005 2006Lowe'sAsset Turnover 1.62 1.64 1.72 1.76 1.69CFFO/OI 1.49 1.17 0.83 0.83 0.87Changes in CFFO/change in OI 1.6 0 0.07 0.8 1.33Changes in CFFO/Change in NOA 0.97 0 0.02 0.31 0.25Total Accruals/Sales 0.10 0.10 0.09 0.08 0.09Other Employment Expenses/SG& 0.025 0.015 0.009 0.015 0.004

Home DepotAsset Turnover 1.94 1.88 1.88 1.84 1.74CFFO/OI 0.82 0.96 0.84 0.71 0.79Changes in CFFO/Change in OI -1.28 1.71 0.33 -0.29 N/AChanges in CFFO/Change in NOA -0.33 0.61 0.13 -0.19 0.69Total Accruals/Sales 0.11 0.11 0.12 0.15 0.19Other Employment Expenses/SG& 0.009 0.008 0.007 0.008 0.009

Tractor SupplyAsset Turnover 2.64 2.74 2.56 2.54 2.35CFFO/OI 0.71 0.65 0.76 0.73 0.59Changes in CFFO/change in OI 0.8 0.55 2.16 0.63 -1Changes in CFFO/Change in NOA 0.51 0.63 0.21 0.49 -0.28Total Accruals/Sales 0.10 0.09 0.09 0.10 0.11Other Employment Expenses/SG& 0.01 0.005 0.004 0.004 0.004

Sherwin WilliamsAsset Turnover 1.51 1.47 1.43 1.65 1.56CFFO/OI 1.01 0.97 0.86 0.98 0.93Changes in CFFO/change in OI 0.69 0.04 -0.24 2.02 0.51Changes in CFFO/Change in NOA 0.78 -0.07 -0.2 N/A 1.19Total Accruals/Sales 0.32 0.33 0.39 0.35 0.34Other Employment Expenses/SG& 0.007 0.008 0.008 0.007 0.006

150

References

1. Lowe’s 10-K

2. www.finance.yahoo.com

3. www.edgarscan.com

4. www.forbes.com

5. www.investor.reuters.com

6. stats.oecd.org/glossary

7. www.photopla.net/wwp0503/exit.php

8. www.scottrade.com

9. stocks.us.reuters.com

10. Business Analysis and Evaluation (Palepu and Healy)

11. Home Depot 10-K

12. Sherwin Williams 10-K

13. Tractor Supply Company 10-K

14. Financial Statement Handout

151