Lowe's Companies Inc (NYSE: LOW) stock finished the week 11.7-percent lower after the retailer reported lackluster earnings and cut full-year guidance Wednesday due to gross margin weakness. Sell-side analysts said the gross margin problem — which the company blamed on inadequate tools for matching prices with costs — overshadowed strong sales numbers and is likely a short-term problem.
Several analysts agreed the market pullback presents a buying opportunity for those willing to look to the long-term.
Morgan Stanley’s Simeon Gutman maintained an Overweight rating on Lowe's with a $123 price target.
Bank of America Merrill Lynch analyst Elizabeth Suzuki reiterated a Buy rating with a $135 price target.
UBS analyst Michael Lasser maintained a Buy and lowered the price target from $125 to $115.
Wedbush analyst Seth Basham remained Neutral on Lowe’s and lowered the target price from $110 to $105.
Mooresville, North Carolina-based Lowe’s issued a revised outlook calling for weaker gross margins in 2019, and it overshadowed strong sales and expense leverage in the quarter, said Morgan Stanley’s Gutman.
“We see this as an unexpected but surmountable obstacle in LOW's transformation story,” the analyst said in a note. “EPS should rebound next year and we see an attractive risk/reward on 2020 estimates.”
BofA’s Suzuki also sees more long-term positives and said the market’s sell-off reaction now presents a buying opportunity.
“No turnaround in retail is without speedbumps, let alone that of a $70 billion retailer,” the analyst said. “We are encouraged by LOW’s strong same-store sales (comp) growth in the quarter and the maintained outlook for sales growth for the full year."
The post-earnings sell-off represents an "especially attractive" buying opportunity, Suzuki said.
UBS’s Lasser agreed the gross margin issues are transient, though he did say it may take more than a quarter to work out the problems.
The analyst also highlighted strong comps, and said they could have been even better had it not been for wet February weather and lumber price deflation. Lasser joined his peers in saying the risk-reward on the stock is attractive, especially given Wednesday’s pullback.
Best In 10 Years
Though the transformation of Lowe’s may include some bumps in the road, the company's long-term outlook is the best in a decade, said Wedbush’s Basham.
“Sparked by shareholder activism and a very strong new CEO in Marvin Ellison, LOW is in the best position in over 10 years to improve its long-standing self-inflicted performance gap with Home Depot Inc. (NYSE: HD),” the analyst said.
Home Depot this week reported weaker-than-hoped for sales in the first quarter, along with several other retailers that weathered a tough three months.
Lowe’s shares were up 0.6 percent at $95.37 at the close Friday.
Lowe's Tumbles Following Mixed Q1 Earnings, Reduced Guidance
Home Depot Analyst Says Renovation Cycle May Be 'Petering Out'
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