Sell-Side Is Constructive On Lowe's After Q3 Earnings Beat

Lowe's Companies, Inc. LOW continues to put up strong margins even on below-expected sales, and the U.S. picture for home improvement is good and likely to improve into next year, sell-side analysts said.

Lowe's put up a strong third-quarter earnings beat on Wednesday and raised full-year EPS guidance, even though comparable store sales growth of 2.2% slightly missed estimates.

The Analysts

Wells Fargo's Zachary Fadem reiterated an Outperform rating and raised the price target from $130 to $135.

Goldman Sachs analyst Kate McShane maintained a Buy rating, increased the target price from $123 to $135 and added the stock to Goldman's Americas Conviction List.

Raymond James analyst Matthew McClintock maintained a Market Perform rating, while boosting the 2020 EPS estimate from $6.50 to $6.57.

Tigress Financial’s Ivan Feinseth continues to recommend a Buy.

The Theses

Lowe's is "distancing itself" from the headwinds of early 2019, Fadem said, adding that Lowe's third-quarter print provides evidence the stock's valuation gap versus competitor Home Depot Inc. HD should narrow.

McShane noted that Lowe's U.S. comp store sales growth came even with a headwind on lumber prices, and little traction in the company's e-commerce efforts.

The stock's risk-reward is compelling, McShane wrote in a note, and she said accelerating sales and margin expansion should drive EPS acceleration into 2021 in the mid-to-high teen rates. Fadem also sees steadily improving comparable store sales and gross margin trends into the fourth quarter.

Macro Outlook For Home Renovation

Analysts said the macro picture for big box home renovation stores is decent.

McShane said home improvement and housing both appear to be on "solid footing," and that lower interest rates should help even more.

For Feinseth, it's a big part of the Lowe's outlook.

"Lowe’s continues to benefit from strong consumer confidence and record low unemployment and the aging housing stock as homeowners ramp up upgrades and repairs," Feinseth wrote. "I believe further upside in the stock exists and continue to recommend purchase."

Lowe's Traffic Muted

But McClintock said he kept a Market Perform rating because store traffic remains muted, and Lowe's is also early in a restructuring story.

"Transactions remain flattish and, even after we attempt to adjust this for digital weakness, still have not reached a level that we believe indicates meaningful broader consumer acceptance of restructuring efforts," McClintock wrote.