JPMorgan Upgrades Lowe's (LOW) to Overweight, Added to Analyst Focus List

JPMorgan analyst Christopher Horvers upgraded Lowe's (NYSE: LOW) from Neutral to Overweight with a price target of $265.00 (from $210.00).

The analyst comments "We are upgrading LOW to Overweight from Neutral and adding it to JPM’s Analyst Focus List as a Value stock idea based on the following reasons: (1) We continue to believe that goods share of wallet headwinds are moderating with trends ultimately reverting back toward wage growth, as this is historically the barometer for consumption trends (Figures 1-3). (2) Specific to the home improvement category, we estimate that we are less than 5% from pre-COVID wallet share, with DIY (75% of LOW’s mix vs. 50% for HD) experiencing a larger headwind since the start of post-COVID normalization in early 2021 (think patio/garden, décor items, and DIY paint when we were locked down). Moreover, LOW’s largest category appliances (13.9% of sales vs. 9.2% for HD) is further along in the deflation process (Figure 4). We also note that LOW’s outdoor garden center averages 32,000 s.f., well above HD’s 24,000 s.f. (and can be seen in the relative mixes with HD more pro oriented, Figures 5-6). Thus, a better spring after two poor weather periods could lead to a faster than expected comp recovery (Figures 7-9). (3) As discussed in our most recent Housing Deep Dive, according to Bloomberg, the market is pricing in 150 bps in rate cuts by this time next year, which suggests mortgage rates fall to ~5.5% by Jan 2025, with levels implied near 6% by September 2024 (both assuming no change in spreads). The last time mortgage rates were at 5.5%, single family EHS trended at ~4.3MM homes, which would represent a >20% growth rate from recent levels. (4) While we continue to think that the rebound will be partly muted by the locked-in mortgage rate dynamic, the sheer potential magnitude of such a recovery suggests a strong acceleration in trends against arguably low consensus expectations (e.g., MSD base case SSS vs. comps of flat/-1% for HD/LOW in 2025 per Consensus Metrix). This churn could propel DIY as home sellers do small upgrades and new buyers buy a new set of basic items when they move in (e.g., garbage cans, flower pots, shades!). This could also help the small/medium pro. (5) As indicated by our note title, we believe it is widely expected that LOW will guide somewhere in the $12.00-$12.50 range for 2024 to clear the decks. Indeed, we have been well-below the Street for nearly two years but our peers have now caught up ($12.70 for 2024 vs. $12.76 per Consensus Metrix and the latter $14.00 into the last print and recent updates in the low $12 range). Typically, retail stocks value toward the low end of the valuation range (and often more closely follow EV/EBITDA vs. PE) during the downward revision process and then re-rate with valuation heading toward the upper end when revisions turn positive (and shifts to a “risk-on” PE view). Currently, LOW is trading at 17.5x PE and 12.7x EV/EBITDA on our 2024 estimates and 15.4x and 12.6x on 2025 (with the more expensive EBITDA valuation currently holding the stock back). Its typical FY1 range is 15-19x PE and 10-14x EV/EBITDA. Our Dec 2024 price target is $265 and is based a very reasonable 18x PE and 13x EV/EBITDA on our 2025 forecasts. We view 18x PE as a normal market multiple and believe LOW should trade at least in-line given the duopolistic nature of the industry and supportive long-term category tailwinds (e.g., aging housing stock, positive demographic trends). Notably, we continue to rate HD Overweight. Like other best in segment, growth names (e.g., COST, ORLY, TSCO, FND), HD’s valuation is at the high end of the range (already at 22x 2025) ."

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 $222.26 yesterday.

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