8 Nov

Lowe’s Stock: Why Is Credit Suisse Bullish?

WRITTEN BY Sharon Bailey

On Wednesday, Credit Suisse upgraded its rating for Lowe’s (LOW) to “outperform” from “neutral.” Credit Suisse is optimistic about the company’s growth prospects amid improving industry demand and low mortgage rates. Also, the firm increased its target price to $129 from $114. Credit Suisse increased its target price for Home Depot (HD) stock to $225 from $213.

Lowe’s stock has risen about 21.9% year-to-date as of Thursday. So far, Home Depot stock has risen 35.6% in 2019 and outperformed the rise of 22.7% in the S&P 500. The stock has been rising since the company announced its strong second-quarter results.

Positive sentiment after Lowe’s Q2 results

Lowe’s stock rose 10.4% on August 21 due to its better-than-expected second-quarter results. The company’s sales grew 0.5% to $21 billion and beat analysts’ estimates of $20.9 billion. Lowe’s overall same-store sales growth was 2.3%. The same-store sales for the company’s US home improvement business grew 3.2% despite lumber deflation and unfavorable weather.

The adjusted EPS grew 3.9% to $2.15 and easily beat analysts’ estimate of $2.01. Strong same-store sales growth and expense leverage drove the company’s earnings growth.

Following the second-quarter results, Credit Suisse, RBC, Citigroup, Wedbush, Telsey Advisory Group, Stifel, and UBS raised their target prices for Lowe’s stock. On September 16, Wedbush upgraded Lowe’s to “outperform” from “neutral.” The firm raised its target price to $135 from $115. Piper Jaffray increased its rating to “overweight” from “neutral” on October 15. The firm increased its target price to $130 from $113.

In October, Oppenheimer raised its target price estimate for Lowe’s stock to $145 from $135. Meanwhile, UBS increased its target price to $130 from $125. Guggenheim raised its target price to $130 from $120.

As of Thursday, the average 12-month target price for Lowe’s stock was $124.27. The estimate implies an upside potential of about 10%.

Growth strategies

Lowe’s is improving its customer engagement by providing better service with special emphasis on the Pro customer or professional customer. The company’s Pro customer spends 5.5x more than the do-it-yourself customer. To attract the Pro customer, Lowe’s is investing in its inventory, providing enhanced services through Pro desk and Pro areas, and taking other service-related initiatives.

The company continues to leverage key brands like Lithonia Commercial Lighting, Bosch, DeWalt, and Little Giant Ladder Systems to boost its Pro business. Lowe’s opened 35,000 new Pro accounts in the second quarter.

Aside from the Pro business, paint is another strategic growth area for Lowe’s. The company is boosting its paint business through an improved service model and a better in-stock inventory position. Attractive offers helped the company’s paint business deliver strong sales growth in the second quarter.

Lowe’s is also focusing on improving its online sales. Lowes.com generated same-store sales growth of about 4% in the second quarter. The company is re-platforming its site to Google Cloud to enhance customers’ experience and improve its online sales.

Lowe’s outlook

As of Thursday, Lowe’s was trading at a 12-month forward PE ratio of 17.5x compared to Home Depot’s 21.6x valuation multiple.

Lowe’s expects its sales to rise by about 2% in fiscal 2019. The company expects same-store sales growth of about 3%. Also, Lowe’s expects an adjusted EPS between $5.45 to $5.65 in fiscal 2019 compared to $5.10 in fiscal 2018. Meanwhile, analysts expect a 1.7% rise in the company’s 2019 sales and an 11.2% rise in the adjusted EPS. Analysts expect Home Depot’s sales and adjusted EPS to grow 2.4% in fiscal 2019.

Lowe’s will announce its third-quarter results on November 20. Analysts expect a 1.6% rise in its sales and 29.8% growth in its adjusted EPS. Home Depot is scheduled to announce its third-quarter results on November 19. Analysts’ revenue and adjusted EPS growth estimate is 4.6% and 0.8%, respectively.

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