Tuesday, February 7, 2023
HomeMarketHome Depot and Philip Morris Are Top Ideas at Cowen. Here's Why.

Home Depot and Philip Morris Are Top Ideas at Cowen. Here’s Why.

Home Depot’s investments in its Pro business are going to pay off in 2023, said Cowen analysts.

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Sarah Silbiger/Bloomberg

Shares of
Home Depot
and
Philip Morris
were rising Tuesday after being named top investment ideas for 2023 by Cowen.

Home Depot (ticker:
HD
) is analyst Max Rakhlenko’s top choice. On Tuesday, he reiterated an Outperform rating and boosted his price target to $379 from $350, arguing that investors were under-appreciating the benefits the company is deriving from its Pro sector, which caters to the professional construction market.

“HD exemplifies best-in-class retail execution with leading Pro share and an accelerating flywheel that should serve the company well into a challenging macro backdrop into 2023,” he wrote in a research note.

The company recently finished an $11 billion investment cycle across the Pro segment, stores, supply chain, and technology, which position it to further consolidate market share in the long run, Rakhlenko wrote. Pro channel expansion will drive market share growth, he added, which he expects will continue to outpace the do-it-yourself segment.

On the consumer staples side, analyst Vivien Azer believes tobacco giant Philip Morris (
PM
) is poised to outperform in 2023. The company has been an early adopter of smoke-free tobacco products, including heated-tobacco products and e-vapor products. It also recently declared victory in its takeover bid of smaller rival
Swedish Match
(SWMA), which produces oral tobacco products, and won the U.S. rights to IQOS heated tobacco products.

These changes will give Philip Morris a first-mover advantage, Azer wrote. Smoke-free products have higher margins than cigarettes — and the company already has made most of the investments needed to scale IQOS and other new products.

“Transformation in tobacco takes time, such that PM’s advantaged competitive position will prove defensible, at least for the mid-term,” she wrote. “The last major innovation cycle in global tobacco took place more than 80 years ago, with the transition to filtered cigarettes. In the U.S., the companies that were early to filters experienced a multi-decade target share tailwind.”

In addition, the acquisition of Swedish Match will help the company diversify its cash flow and reduce foreign-exchange exposure, a headwind that has been dragging the stock down in recent years, she added. Azer reiterated an Outperform rating and a $115 price target on Philip Morris shares.

That said, not every analyst on Wall Street shares Azer’s enthusiasm for the stock. Citi on Tuesday resumed coverage of Philip Morris with a Neutral rating, arguing that while the Swedish Match acquisition will be accretive to earnings per share in the long run, the suspension of business in Russia would drag earnings down in fiscal 2023.

Shares of Philip Morris inched up 0.2% to $102.84 on Tuesday, while Home Depot stock jumped 3.4% to $339.16. The
S&P 500
rallied 2.2% following a better-than-expected U.S. consumer inflation reading.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

Credit: marketwatch.com

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