JPMorgan raised Lowe's rating to overweight due to recovery in the home improvement sector

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Analysts at JPMorgan raised their rating on Lowe's Companies ( LOW ) from Neutral to Overweight and included the stock in their Monday Focus List. They also raised their price target on the stock from $210 to $265.

“We continue to believe that problems with the share of commodity spending are easing, with the trend returning in line with income growth, which historically serves as a metric for spending patterns,” the analysts noted.

Furthermore, analysts predict that the share of consumer spending devoted to home improvement is currently about 5% lower than it was before the COVID-19 pandemic. Within this sector, the DIY category, which represents 75% of Lowe's ( LOW ) turnover compared to 50% for Home Depot ( HD ), has encountered more headwinds since the return to normality began in early 2021.

They also point out that Lowe's main sales division, appliances, which contributes 13.9% of total sales compared to Home Depot's 9.2%, is still in the price cut phase.

Analysts expect housing market rates to fall by 150 basis points over the next year. That decline could result in mortgage rates falling to around 5.5% by January 2025 and to nearly 6% by September 2024, provided the spread remains constant.

Based on historical data, when mortgage rates reach 5.5%, sales of existing single-family homes (EHS) typically reach close to 4.3 million. This suggests a possible increase of over 20% over current sales figures.

“While we expect the increase to be somewhat tempered by the phenomenon of homeowners holding fixed mortgage rates, the sheer scale of the potential recovery implies a significant boost to activity that could exceed generally modest expectations,” the analysts noted.

“As the title of our report indicates, we expect LOW to set its 2024 forecast in the $12.00-$12.50 range to prepare for future moves,” the analysts said.

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