LOW

Publicly traded companies mentioned herein: Home Depot Inc (HD), Lowe’s Cos Inc (LOW)

Highlights

The presenter thinks the timing and risk/reward setup are good for a long position in Lowe’s (LOW). Questions are swirling about the health of the US housing market, and sentiment seems to have soured recently; however, the situation does not seem to be “bubble-like” at this time. As such, LOW could benefit from a mean reversion in macro sentiment. Also, there’s an important micro story, with new CEO Marvin Ellison looking to improve margins and return capital to shareholders. At LOW’s Analyst and Investor Conference, FY 2019 guidance was provided that included 235 - 250 bps of operating margin improvement and $6.10 of EPS. Assuming earnings can continue to grow and reach $7/share in 2020, the stock is trading at an attractive 13.5x 2020 EPS (a full turn below the lower-end of the historic forward-year multiple). And, while LOW is not likely to be awarded a 16.5x multiple like Home Depot, there could be optionality around a good Q4’18 print and reiteration of guidance, as well as upside from capital deployment.