Morgan Stanley Is Now More Confident In Home Improvement Industry Growth

Morgan Stanley has upgraded Home Depot Inc HD to Overweight, while reiterating its Overweight rating on peer Lowe's Companies, Inc. LOW, as it now has greater confidence in home improvement industry growth.

The brokerage’s checks suggest the housing recovery is in "middle innings," with strong underlying fundamentals. In addition, Morgan Stanley says rising interest rates should not impede growth in the near term.

Further, the sector’s oligopoly structure provides companies opportunities for share gain, and it is well-equipped for the omni-channel world.

Bullishly Comparing Home Depot And Lowe's

Analyst Simeon Gutman says Home Depot has more stores than Lowe’s in yet-to-recover and recovering markets.

Related Link: The Dow's Often-Forgotten, Overlooked Champion: Home Depot

“Consensus embeds 4–4.5 percent SSS for HD in 2017/2018. An extended housing recovery and a market complexion which favors HD outcomping LOW points to upside to consensus estimates,” Gutman wrote in a note.

Gutman also finds Home Depot’s valuation compelling for a mega cap retailer offering low-teens EPS growth over next two years. As such, the analyst raised his price target to $165 from $150.

Meanwhile, Gutman still remains bullish on Lowe’s, given its leverage to the housing recovery and attractive valuation. The analyst also upped his price target to $88 from $83.

“Higher operating leverage to a top-line recovery enabling it (LOW) to generate mid- to high-teens EPS growth over the next few years,” Gutman added.

At last check, shares of Home Depot were up 0.17 percent to $145.50, while Lowe’s were down 0.27 percent to $76.59.