Lowe’s is an underdog with room to improve, says Bank of America

An employee loads a mirror onto a truck outside a Lowe's store in Burbank, California.

Patrick T. Fallon | Bloomberg | Getty Images
An employee loads a mirror onto a truck outside a Lowe’s store in Burbank, California.

One analyst is calling Lowe’s the quintessential underdog in a tumultuous world of retail.

Bank of America has reinstated its coverage on the home improvement retailer, pegging it a buy rating with a $95 price target. Lowe’s stock closed Friday at $74.65 a share, down about 3 percent over the past 12 months. For 2017, though, shares have rallied roughly 5 percent as of Friday’s close. The stock was up 1.1 percent Tuesday morning.

“We believe increasing housing market momentum and big ticket spending will provide support to LOW longer term, particularly as it begins to see benefit from its restructuring initiatives over time,” Bank of America analyst Elizabeth Suzuki wrote in a Tuesday note to clients.

“We believe LOW’s profitability will also continue to improve and its comp gap with HD will continue to narrow as product differentiation and resets help drive comps.”

As retail goes, Lowe’s and its larger rival Home Depot paint a better picture than other companies struggling to post positive same-store sales.

In their latest quarters, Lowe’s same-store sales climbed 4.5 percent, while Home Depot reported growth of 6.3 percent for the closely watched retail metric. Both easily topped Wall Street expectations.

Suzuki has called Lowe’s the “cheaper but riskier name in home improvement.” There is still room for it to grow in Mexico and Canada, she added.

Bank of America still calls Home Depot “the leader” in home improvement retail.

In a separate note Tuesday morning, Suzuki and her firm reinstated coverage on the retailer, assigning it a buy rating and a price target of $170 per share. Home Depot’s stock closed Friday at $150.78 per share, having risen 12 percent over the past 12 months. It was up nearly 1 percent in Tuesday’s session.

“The macro backdrop for growth in home improvement spending is favorable, and HD is also well positioned to continue its solid track record of share gains,” Suzuki said.

One particular bright spot has been Home Depot’s increased investments in so-called smart home products, she said. Sales of these products are actually growing faster than Home Depot’s company average.

“In order to compete with Amazon and brick-and-mortar retailers with exclusive smart-home products, HD will need to establish a dominant market position as the expert in home automation, which requires investment in sourcing initiatives, employee education, and marketing,” Suzuki said.

On the whole, the story for home improvement retailers remains much more positive than that of other consumer-facing companies. Old houses tend to need investment, and millennials are seeking out pros for project assistance. Meanwhile, a favorable housing cycle is benefiting everyone, according to Bank of America.

One fear that continues to haunt some investors, though, is the idea of Amazon wrecking havoc on the space. The internet giant boasts big-name brands like Black + Decker, Honeywell and Kohler on its own home improvement site.

On the days Home Depot and Lowe’s reported second-quarter earnings, their shares fell despite upbeat results.

“HD is hitting on all cylinders, yet shares are weak, which may reflect further concerns about future online competition. …” Jefferies analyst Daniel Binder wrote in a note to clients last month.

HD (blue) vs LOW (green) year-to-date performance 

Source: FactSet

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