Despite Disappointing Q2 Results, BMO Maintains Outperform On Lowe's

BMO maintained its Outperform rating on Lowe's Companies, Inc. (NYSE: LOW), despite a disappointing second quarter results, as it still sees above average EPS growth and upside in the stock to $86.

The brokerage raised its price target by $1 to $86, implying a potential upside of 10.5 percent over Friday's close.

"We see the RONA banner contributing at least $4.5 billion in sales in 2017 ($3.5 billion from the retail network and $956 million from wholesale distribution) accounting for about 6.5% of LOW's consolidated sales," analyst Wayne Hood wrote in a note.

Despite accretive to earnings, Hood sees the banner to pressure margin rate and ROIC, thereby leaving the management's 2017 EBIT margin target of 11 percent, announced prior to the acquisition, as too optimistic by about 100bp.

As such, the analyst cut his continuing 2016 and 2017 EPS estimates to $3.98 and $4.64 from $4.00 and $4.72, respectively and see EPS of $5.20 in 2018.

Taking into account the opportunity to improve RONA's EBIT margin rate, the analyst sees an EPS growth rate of 14.9 percent from 2015 to 2020.

"We see the company's capital structure and FCF leading to at least $3.5 billion in annual repurchase of common stock or adding 2pts to the continuing EPS growth rate," Hood added.

At time of writing, shares of Lowe's were down 0.44 percent to $77.48.