- Morgan Stanley analyst Simeon Gutman calls Lowe's (LOW -2%) one of the firm's top investment ideas (Overweight rating, $87 PT) after sitting down with the home improvement retailer's management last week. Snippets from the analyst's note are below.
- Industry snapshot: "The US housing stock is aging (33 years) while affordability has never been better. We estimate there is a $12-15 billion sales opportunity as industry demand normalizes. This does not include any upside potential from Sears, which continues to cede market share (~13% of HI market)."
Upside with Pro: "Newly launched professional brands along with a pro only website and more targeted services are helping drive gains with the Pro. There was a step change in pro sales momentum in Q1, a clear signal that this strategy is resonating." - Margin watch: "Incremental margins are around 25% and we see a pathway for them to climb to 30%. There is heightened internal focus on reducing indirect costs such as store fixtures, telecom, and utilities. There is also a medium to longer-term cost focus as LOW looks to centralize various corporate and store level functions."
- Shares of Lowe's have outperformed Home Depot this year (+3.1% vs. -2.5%). The company also achieved the rare feat of outcomping its rival last quarter.