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"Never stop improving."

That's the new slogan on ads from home improvement retailer Lowe's Companies, Inc. (LOW - Analyst Report). And that's just what the company is striving to do.

Management recently laid out an ambitious plan to earn $3.66 per share in 2015, up from ~$1.61 in 2011. The company believes it can get there through solid same-store sales growth, margin expansion, and share buybacks.

Company Description

Lowe's is the second largest home improvement retailer in the world. It operates 1,744 stores throughout North America.

The company is headquartered in Mooresville, North Carolina and has a market cap of $33.6 billion.

Third Quarter Results

Lowe's reported better than expected earnings for the third quarter of 2011. Earnings per share came in at 35 cents, beating the Zacks Consensus Estimate by 2 cents. It was a stellar 21% increase over the same quarter in 2010.

Sales rose 2% to $11.852 billion, ahead of the Zacks Consensus Estimate of $11.690 billion. Same-store sales were up 0.7%.

The gross profit margin did contract a bit due to higher input costs, falling 100 basis points to 34.06%. EPS benefited from a 10% decline in the weighted average diluted shares outstanding as the company continues to buy back its stock.

Outlook

Following its Q4 results, management said that it expects EPS of $1.57 to $1.60 for the fiscal year ending February 3, 2012.

Also, at its Investor Conference in December, management reiterated its guidance for 2011 and also laid out an ambitious 5-year earnings plan.

The company stated a target EPS of $3.66 by 2015, which implies a compound annual growth rate of 24%. Management expects to get there through average same-store sales growth of 3.5%, margin expansion, and share buybacks.

This drove analysts to revise their estimates higher, sending the stock to a Zacks #2 Rank (Buy).

The Zacks Consensus Estimate for 2011 is now $1.61, a penny above guidance, and 11% above 2010 EPS. The 2012 consensus estimate is currently $1.79, also corresponding with 11% EPS growth.

Returning Value to Shareholders

Lowe's generates strong free cash flow and has been using that cash to reward shareholders through stock buybacks and dividend hikes. The company spent $2.4 billion through the first nine months of fiscal 2011 buying back shares, for instance.

It currently pays a dividend that yields a solid 2.1%. Since 2000, the company has increased its dividend at a compound annual rate of 27%:

LOW: Lowe's Companies, Inc.

Valuation

The stock has been on a tear the last several weeks thanks to somewhat encouraging data on the housing market. But valuation still looks very reasonable for LOW.

Shares trade at 14.8x 12-month forward earnings, well below the industry median of 17.3x, and below its 10-year median of 16.0x.

Its price to book ratio of 2.0 is also below the industry multiple of 2.7 and its historical multiple of 3.1.

The Bottom Line

With rising estimates, strong growth projections, shareholder-friendly management and reasonable valuation, Lowe's offers investors a lot of upside potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.

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