Lowe’s stock has experienced a surge in 2023, and an analyst predicts that the company will continue to make gains in the coming year as it closes the gap with its competitor, Home Depot.
Analyst Dean Rosenblum from Alliance Bernstein upgraded Lowe’s (LOW) stock to Outperform from Market Perform on Tuesday. He also raised his price target to $282, implying a 21% upside from the previous closing price of $232.51.
In a note to clients, Rosenblum explained that the upgrade is based on a combination of positive trends that are expected to lead to accelerated earnings per share (EPS) growth and an expansion of Lowe’s multiple.
One of the highlights mentioned by the analyst is Lowe’s impressive sales growth in its Pro business, which caters to contractors. Historically, Home Depot has dominated this sector, but Lowe’s is now starting to catch up. In the first two quarters of fiscal 2023, Lowe’s Pro sales grew at a faster rate than Home Depot’s, indicating that there is potential for further growth in this category.
Furthermore, as Lowe’s expands its Pro business, its margins are also expanding. The company’s operating margin increased from 14.4% to 15.6% in the latest quarter, exceeding Home Depot’s margin of 15.4%.
Rosenblum noted that Home Depot has typically commanded a higher valuation than Lowe’s due to its superior operating margin and larger Pro sales mix. However, now that Lowe’s is making progress in both areas, it is becoming increasingly difficult to justify Home Depot’s premium multiple over Lowe’s. It is expected that the market will recognize this shift as well.
In conclusion, Lowe’s positive trajectory and its efforts to close the gap with Home Depot are encouraging signs for investors. With a potential upside of 21% according to the revised price target, Lowe’s stock presents an attractive investment opportunity.
Home Improvement Sector Poised for Rebound
The U.S. housing market is showing signs of a rebound, which could provide a much-needed boost to the home improvement sector. According to industry expert Rosenblum, higher mortgage rates have led many potential buyers to delay purchasing homes, resulting in fewer new-home renovation projects.
However, there is optimism in the air. Rosenblum believes that the worst is behind us and anticipates a positive outlook for the U.S. Home Improvement (USHI) market both in the near term and the medium- to long-term.
Lowe’s, a leading player in the industry, shares this bullish sentiment. During their recent earnings call, CEO Marvin Ellison highlighted that home improvement projects were merely postponed and not canceled. He also pointed out several favorable trends that will contribute to increased spending in the future. These include the aging housing stock driving remodel and repairs, as well as other factors like millennial household formation, aging-in-place, and the persistent nature of remote work.
Nonetheless, it is worth noting that Lowe’s shares did experience a slight dip of 1% to $230.36 in early morning trading on Tuesday.