Jefferies' Renewed Optimism For Lowe's Fuels Upgrade

Shares of Lowe's Companies, Inc. LOW have gained nearly 40 percent over the past year, but Jefferies sees room for upside ahead. 

The Analyst

Jefferies' Daniel Binder upgraded Lowe's' stock rating from Hold to Buy with a price target boosted from $81 to $129. The stock is Jefferies' franchise pick for 2018. 

The Thesis

The case for bullishness on Lowe's' stock is three-fold, Binder said in the upgrade report. (See the analyst's track record here.) 

The factors in Jefferies' thesis include:

• A shareholder activist campaign.
• A "frictionless" process of appointing and nominating new board members.
• A "genuine potential" for improved sales productivity, higher operating margins, stronger cash flow, greater share buybacks and a higher return on investment.

With these catalysts in mind, Lowe's has "clear opportunities" to not only double its EBIT over a five-year period but can also triple its earnings per share, the analyst said. The nearly 20-percent valuation discount versus its larger rival Home Depot Inc HD could improve in Lowe's favor over time. Lowe's needs to, at the very minimum, "show progress" toward reversing the widening gap in key operational metrics versus Home Depot, Binder said. 

Finally, Lowe's stands to benefit from "share donation" as Sears Holdings Corp SHLD continues to close stores, according to Jefferies.

Even if Lowe's captures just 25 percent of Sears' share in the appliance space, it could see an incremental $700 to $800 million in sales and generate an earnings per share boost of up to 15 cents, which would be worth an extra $2 to $3 per share. U.S. tax legislation could result in an extra $1.3 to $1.9 billion in sales, which would be worth an extra $6 to $10 per share, Binder said. 

Price Action

Shares of Lowe's were up nearly 1 percent at $102.44 at the time of publication Monday morning. 

Related Links:

Lowe's Continues To Trail Home Depot But Is Now A Buy, Analyst Says

Lowe's Earns Itself A Double-Upgrade From Bernstein

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