J.P Morgan: Lowe's Reports EPS Beat On Gross Margin Performance

Net-net, in spite of soft sales, J.P Morgan continues to see an upward bias to Lowe's LOW estimates and believes the Street is underestimating the power of the model from a margin and cash flow perspective. In views this biases the stock to the upside with the potential range of 2011 EPS in the $1.55-$1.75 range. Using its historical outyear valuation of 15x, this suggests the stock should reach $23-$26 (with the latter representing the Dec-11 price target). LOW reported 3Q10 operating EPS of $0.31 vs. JPM's estimate of $0.29 and consensus of $0.30. Same-store sales were 0.2% vs. 1.0%E. Gross margin increased 85 bps to 35.0%, well ahead of JPM's 34.4%E, while total operating expenses levered ~10 bps to 28.3% vs. 28.1%E. The gross margin increase and operating expense leverage combined for a 90-bp increase in operating margin to 6.7% vs. 5.8%E. J.P Morgan has an Overweight Rating and $26 PT on LOW LOW closed Monday at $21.46