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Argus Stock Research: Reiterate Buy on Lowe’s Companies (LOW) Following 2Q Earnings

Joanna Kong
Yahoo Finance Premium

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Argus reiterated a BUY rating on Lowe's Companies Inc. (NYSE: LOW), while raising the target price to $122 from $120. On August 21, Lowe’s reported earnings of $2.15 per share, which topped our estimate of $2.03. The company saw positive comparable sales in 9 of 13 product categories, with above-average performance in paint, appliances, decor, tools and hardware, and outdoor living. Management was particularly pleased by the turnaround in its paint business. Craftsman sales helped LOW to gain market share and contributed to the tool business's above-average comparable sales.

We believe the company's new CEO Marvin Ellison has the experience and ability to improve operations and raise profitability at Lowe's. While we were disappointed by LOW's first-quarter performance, the company's just-reported 2Q results provided reassurance that our optimism is not misplaced. The company is improving its business analytics, which should lead to better gross margin performance and better inventory turnover.

Mr. Ellison spent more than a decade improving customer service and efficiency at Home Depot. More recently, he served as CEO of J.C. Penney. We believe his recent experience in the very difficult department store business will give him a sense of urgency to constantly reduce costs and improve procedures at Lowe's. He emphasized that he will look at whether Lowe's is earning appropriate returns on its investments.

Among his first moves was to hire David Denton as CFO. We have known Mr. Denton for many years in his role as CFO of CVS. He has successfully managed a complex organization, emphasized shareholder-friendly dividend increases and share repurchases, and provided clear financial guidance and objectives.

To be sure, the LOW shares have performed very well despite under-earning their chief rival. We believe that there is still significant upside if Mr. Ellison and his new team continue to follow through on generating higher returns on capital.

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