Lowe's (LOW) Exiting Australia is Positive - UBS

Lowe's (NYSE: LOW) exiting its joint venture with Woolworths in Australia should be a welcome development for the stock as it implies better management of capital although the financial impact is likely to be negligible, according to UBS.

LOW has put its one-third stake to its JV partner and will be remunerated for its shares. The parties will now negotiate the value of the business (with the help of 2 independent experts). The JV has revenues of ~$1.6 b US and has been losing ~$200 mm per year. The analyst believes that the ultimate recovery for LOW matters less than the signal it sends to the market that it intends to remain disciplined with its capital allocation.

LOW recognizes its share of the losses from the JV in its SG&A. Through the first 3 quarters of '15, we believe these losses have amounted to ~$37 mm. Thus, the FY impact is probably in the $50 to $60 mm range. This means Lowe's '16 EPS will likely be boosted by $0.03 to $0.05, or roughly 1%. Furthermore, it can allocate the capital that would have been earmarked for the JV towards investing in its North American business, or towards buying back its shares. Over the last few years, LOW has invested a net $930 mm in this JV, equal to 1.5% of its current market cap.

The JV operates the Master's Home Improvement retail chain and Home Timber and Hardware Group's retail stores. No change to Buy rating or $94 PT.

For an analyst ratings summary and ratings history on Lowe's click here. For more ratings news on Lowe's click here.

Shares of Lowe's closed at $68.99 yesterday.

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