3 Pillars Make Lowe's A Top Investment Idea For Morgan Stanley

Morgan Stanley’s Simeon Gutman believes Lowe's Companies, Inc. (NYSE: LOW) “offers a compelling mix of top-line and margin visibility in an increasingly choppy retail backdrop,” and mentioned that the company was one of Morgan Stanley's "Top Investment Ideas."

Gutman maintains an Overweight rating on the company, while raising the price target from $84 to $87.

The analyst stated there were three key pillars of Lowe’s Companies’ story.

Macro Factors

The home improvement retail sector continues to be healthy, with demand continuing to recover from below-average levels.

Gutman pointed out that the private fixed residential investment was still 55 basis points below its 15-year average, while the company had indicated that its higher ticket discretionary business was only halfway through recovery to its prior peak.

Related Link: BTIG Initiates Shares Of Lowe's At Buy

“We estimate there is a $12–15 billion sales opportunity as industry demand normalizes,” Gutman went on to say.

Professional Customers

The analyst believes Lowe’s has significant market share opportunity in the pro segment. Although this segment accounts for only 30 percent of the company’s sales, it has recently led to disproportionate comp growth.

According to the Morgan Stanley report, “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.”

Flow-Through Improvement

Gutman expects Lowe’s to see stronger flow through during the remainder of 2016, due to expanding gross margin and the company’s efforts in this direction.

“LOW is able to deliver positive store-only comp growth while simultaneously growing its online mix, which is driving stronger returns,” the analyst added.