Citi Upgrades Lowe's Companies To Buy

Citi has upgraded Lowe's Companies, Inc. (NYSE: LOW) to Buy from Neutral, saying that a shift in consumer spending towards home furnishings should benefit the company, which is the second-largest home improvement chain in the U.S."While recent reports from department stores and other retailers indicate a challenging consumer spending environment ahead, we would argue more share of wallet is going to categories outside apparel," analyst Kate McShane wrote in a note."The pockets of growth within retail appear to concentrated with home improvement and home furnishings spending (based on census data and consistency in comps)," McShane added.The analyst said Lowe's comps should grow as "home improvement tide continuing to lift all ships" amid improving housing market, pentup demand and easing credit scores."HI spending at retail is near prior peak levels w/o the benefit of a bubble. HD currently has a 13% EBIT margin vs. LOW's 9% EBIT margin, which leaves more opportunity for EPS upside," the analyst noted.Further, the analyst highlighted that the lack of beat and raise from Lowe's strong first quarter result shows the company's conservativeness. On contrast, Home Depot Inc (NYSE: HD), which also typically issue conservative outlook, raised their full year estimates on more modest top and bottom line improvements. "In our view, LOW could probably grow EPS this year by about 25% through a combination of a 5.3% comp (a 50 bps acceleration from last year), EBIT margin improvement by 94 bps (high end of guidance), and $3.8B in share buybacks (above guidance but consistent with last year)," McShane elaborated.In a more bullish scenario, the analyst said he sees LOW delivering a 6.0 percent comp this year (matching HD on a 2-year stack) and assuming an extra 19 bps of SG&A leverage would add an incremental $0.11 in EPS.Further, the analyst shed light on the aspect that Lowe's would eventually close the comp gap with Home Depot, noting that with the first quarter results, "Lowe's could be at a pivotal point where its quarterly comp gains outshine HD." "Yes, stacks are easier for LOW but reaching new higher comp levels should bode well for operating expense leverage and LOW has about 400 bps of operating margin improvement to go before it matches HD's levels. In our view, if LOW continues to execute well, its earnings algorithm could be a more interesting story," McShane elaborated.At the time of writing, shares of Lowe's rose 0.99 percent to $79.38. The analyst raised the price target on the stock to $90 from $83, implying a share price return of 14.5 percent.