Lowe's Shares Edge Higher As Bank Of America Adds Stock To 'US1' List

Shares of Lowe's Companies, Inc. LOW edged higher by nearly 1 percent ahead of Wednesday's market open after the company was added to Bank of America's "US1 list."

Bank of America's Denise Chai suggested in a research report that investors take advantage of recent weakness in Lowe's stock following its second-quarter earnings print which "disappointed on comps." The analyst noted that the company will "continue to benefit from supportive macro trends" such as rising home prices, housing turnover and new home formation.

Chai pointed out that Lowe's comp gap with its biggest rival, Home Depot Inc HD has an "out-sized impact" on sentiment towards Lowe's stock. Specifically, the company's 2 percent comp was "underwhelming" compared to Home Depot's reported 4.7 percent comp.

The analyst cited the majority of the gap between the two companies to Home Depot's higher Pro and Western U.S. exposure in addition to Lowe's higher share of exterior project sales versus Home Depot.

Related Link: Despite Disappointing Q2 Results, BMO Maintains Outperform On Lowe's

Following Lowe's selloff, the stock is trading at a 3x P/E discount to Home Depot at 16x 2017E. Moreover, Lowe's is trading below its five-year average of 20x and 10-year average of 18x.

"As a large cap stock with EPS forecast to grow at an 18 percent CAGR through 2018, low financial leverage (2.2x) and about $4 billion of capital return per year, we think LOW deserves to trade at a premium," Chai wrote.

Finally, Chai stated that the market is underestimating the synergy potential from its acquisition of RONA.

Bottom line, Chai estimates that Lowe's will see comp acceleration of 3.5 percent in the third quarter and 4 percent in the fourth quarter which would act as a "positive catalyst for the stock" — even more so when considering the analyst's 21 and 34 percent earnings per share growth in the coming two quarters.

In addition to be adding to the firm's US1 list of top ideas, the stock remains Buy rated with a $94 price target.

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