Sympathy Companies In Play Following Lumber Liquidators, Tractor Supply Disappointments
Deutsche Bank analyst Mike Baker thinks the sell off is justified and cut estimates for both companies below Wall Street’s consensus. The research report explained, “With HD/LOW and LL all related to housing in some capacity, we calculate a positive correlation to comps of between 56%-57% since 2008. Similarly, the exposure to outdoor leads to a positive correlation of 49%-56% for HD and LOW versus TSCO on the comp line.”
The note also pointed out that the Midwest, Northeast and upper Mid Atlantic were the hardest hit regions for Lumber Liquidators, which account for almost 40 percent of Home Depot’s and Lowe’s stores.
Regarding Home Depot’s valuation, Baker wrote, “Our price target is $85, which is based on 16x our 2015 EPS estimate. This is a slight premium to our long term growth rate forecast of 15%, with 8% coming from the EBIT line and the rest from buybacks. We see a faster EBIT growth rate for LOW due to their lower margins, which leave more room for upside. The biggest downside risk for HD is exposure to housing markets. The biggest upside risk in our view is better than expected operating margins, particularly from SG&A leverage.”
Regarding Lowe’s valuation, Baker wrote, “Our price target of $54 is based on 17x our 2015 EPS estimate. This is in line with our long term EPS growth forecast of 17%, with 9% from EBIT and the rest from buybacks. The biggest downside risk is LOW’s exposure to housing turnover, in our view.”
Latest Ratings for LL
|Dec 2014||Nomura||Initiates Coverage on||Buy|
|Nov 2014||Morgan Stanley||Upgrades||Equal-weight||Overweight|
|Nov 2014||Canaccord Genuity||Downgrades||Hold||Buy|
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