Market Overview

Citi: Home Depot, Lowe's Valuation Gap 'Unjustified'

Citi: Home Depot, Lowe's Valuation Gap 'Unjustified'
Related HD
A Guide To Guessing Where Amazon Is Going
'Amazon Is Playing Hardball': Home Improvement Chains Slide After Kenmore, Alexa Join Forces
Insight Capital Research & Management Inc Buys Amazon. ... (GuruFocus)
Related LOW
Stocks Going Ex Dividend the Fourth Week of July
A Guide To Guessing Where Amazon Is Going
Gradient Investments LLC Buys Global X MLP, Exelon Corp, MetLife Inc, Sells Eli Lilly and Co, ... (GuruFocus)

Recent results reported by several department stores companies and other retailers have indicated a tough consumer spending environment ahead.

Citi’s Kate McShane commented, however, that a larger share of spending was going to categories outside apparel. She added, “The pockets of growth within retail appear to concentrated with home improvement and home furnishings spending.”

Analyst Kate McShane upgraded the rating for Lowe's Companies, Inc. (NYSE: LOW) from Neutral to Buy, while raising the price target from $83 to $90, saying that the company stands to benefit from the shift in spending towards the Home category.

Related Link: Lowe's Completes RONA Acquisition For $2.4 Billion

The company’s comps and margins are expected to improve going ahead. McShane wrote, “The housing market is improving, pent-up demand remains, and credit scores continue to ease.”

Wide Valuation Gap With HD Unjustified

Over the past few months, the valuation gap between Home Depot Inc (NYSE: HD) [Rated: Buy, PT $152] and Lowe's has continued to widen and is now at a 3-year high. Home Depot has exhibited more consistent execution, which could justify a higher multiple. The analyst pointed out, however, that this has been the case for more than 3 years, and “the valuation gap has usually stayed tighter.”

Moreover, Lowe's may achieve better comps than Home Depot going ahead. Reaching higher comp levels would have a positive impact on operating expense leverage. Lowe's has to achieve 400 bps expansion in operating margins to reach Home Depot’s levels. McShane added, “In our view, if LOW continues to execute well, its earnings algorithm could be a more interesting story.”

Latest Ratings for HD

May 2017Atlantic EquitiesDowngradesOverweightNeutral
Feb 2017Morgan StanleyUpgradesEqual-WeightOverweight
Feb 2017BernsteinInitiates Coverage OnMarket Perform

View More Analyst Ratings for HD
View the Latest Analyst Ratings

Posted-In: CitiAnalyst Color Long Ideas Upgrades Price Target Reiteration Analyst Ratings Trading Ideas Best of Benzinga


Related Articles (HD + LOW)

View Comments and Join the Discussion!