Dollar Tree Rakes in the Green; Yum! Brands EPS in Peril: Street Calls of the Week
2023.10.22 10:46
Here is your Pro Recap of the top takeaways from Wall Street analysts for the past week: upgrades for Wayfair and Dollar Tree, and downgrades for Lithium Americas, Foot Locker, and Yum! Brands.
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Wayfair
What happened? On Monday, Loop Capital upgraded Wayfair (NYSE:) to Hold with a $50 price target.
What’s the full story? Along with Loop Capital’s upgrade of Wayfair, the firm also cut its price target by $10, and Loop cites lower margin expectations and higher interest costs as the main drivers of that decision. Loop analysts also note that their 2024 adjusted EBITDA forecast of $385 million is well below the consensus estimate of $448M, which is true (I ran the math).
However, they believe the stock price has already reflected these challenges, as it has fallen 16% so far this month. Loop Capital’s original thesis was that Wayfair’s growth was fueled by debt, and that the cost of debt had risen significantly due to the market conditions.
Loop also points out that the demand for home goods has been declining after the pandemic-induced surge (Goldman pointed this out midweek also). Loop analysts are uncertain about the future prospects of the home-furnishings industry, but they think the current share price offers a fair valuation for Wayfair.
Hold at Loop means: “The stock is expected to perform in line with the market or its peer stocks over the next 12 months.”
How did the stock react? Shares did the usual scalp-trader abuse roundtrip, gaining about $1.50 only to linger for a couple hours until the regular-session open, in which the stock was sold back down $1.50 during volatility in the session’s opening ETF positioning. Once 9:45AM New York time rolled around, shares took off and ended the day up 1% at $47.78.
Dollar Tree
What happened? On Tuesday, Goldman upgraded Dollar Tree (NASDAQ:) to Buy with a $137 price target.
What’s the full story? Goldman Sachs raised DLTR to Buy, citing strong earnings growth potential for the dollar store chain. Goldman analysts expect DLTR to continue gaining market share from its improving traffic trends, driven by loyal new customers, a better cash flow outlook for lower and middle income consumers in 2024, and enhanced store experience after recent investments.
Goldman also sees lower freight costs as a significant tailwind for DLTR in the second half of 2023. Moreover, Goldman believes DLTR’s multiyear turnaround efforts will result in an EPS compound annual growth rate of 19% through FY26, which is much higher than that of most of its peers in the broadline and dollar-store sectors.
Buy at Goldman means the following: “Being assigned a Buy… on an Investment List is determined by a stock’s total return potential relative to its coverage universe.”
How did the stock react? Shares rocketed up a solid $2 to trade a $112 handle at 4:05 AM, and they never looked back. Dollar Tree ended Tuesday’s regular session at $115.37, gaining a whopping 4.8%.
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Lithium Americas
What happened? On Wednesday, Deutsche Bank downgraded Lithium Americas (NYSE:) to Hold with a $7 price target.
What’s the full story? Deutsche sees high execution risk and rich valuation for the lithium producer. Deutsche analysts are less optimistic than Lithium Americas management about the Thacker Pass project, a US-based lithium asset backed by General Motors (NYSE:) and the US Energy Department. They believe the project is still in an early stage of development and that it faces uncertainties in the context of the Inflation Reduction Act (IRA).
The analysts valued Lithium Americas using a discounted cash flow (DCF) methodology and a 10% discount rate, which they consider fair in terms of reflecting the execution risk and the safe jurisdiction. They lowered their price target from $9.33 to $7, implying a negative return potential for the stock. They also provided a sensitivity analysis around the discount rate, showing that a 12% discount rate would result in a $3.15 net asset value (NAV) per share, while an 8% discount rate would imply a $12 NAV per share.
Hold at Deutsche Bank means: “We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.”
How did the stock react? Shares deflated rapidly from a Tuesday regular session close of about $9.10, falling over 10% in the next 24 hours to close Wednesday’s regular session at $8.16 after particularly heavy selling on that session’s open.
Foot Locker
What happened? On Thursday, Goldman downgraded Foot Locker (NYSE:) to Sell with an $18 price target.
What’s the full story? Goldman analysts see potential downside to FL’s current valuation, as the stock trades at around 12x earnings estimates for the next 12 months vs. its three- and five-year averages of 9.3x and 9.4x, respectively. The analysts believe that FL’s high valuation increases the risk of downside if demand trends remain weak in the near term.
Goldman analysts have lower EPS estimates for FL than the consensus does for both 2023 and 2024. They note that the company has lowered its 2023 guidance twice since its March analyst day. Goldman analysts also highlight that the company continues to face soft demand and high promotions as it tries to clear its excess inventory levels, with sales declining by 9.9% year over year in Q2, while inventory levels have increased by 11.4%.
Goldman compares the current situation with that of the 2007 and 2008 period, when FL reported weak sales and higher markdowns in the fourth quarter of 2017. They recall that the stock was trading at a low of around 9.5x forward earnings in January 2008.
Further, Goldman sees FL struggling to stabilize its market share, writing that while Nike (NYSE:) “continues to account for the majority of FL’s offering, in our view, the reduced product depth will likely continue to impact FL traffic and comp growth. “
Sell at Goldman means: “Being assigned a… Sell on an Investment List is determined by a stock’s total return potential relative to its coverage universe.“
How did the stock react? Shares opened the regular session at $21.60 and closed the day at $21.84, losing a dime vs. the prior close. The meat of the beatdown happened premarket Thursday at 4AM, when traders with market access and capabilities could begin trading the equity. Foot Locker traded as low as $20.38 after opening the premarket session at $21.97.
Yum! Brands
What happened? On Friday, Redburn-Atlantic Research downgraded Yum! Brands (NYSE:) to Neutral with a $115 price target.
What’s the full story? Redburn-Atlantic cuts YUM as it sees lower EPS growth prospects due to the change in capital structure. Redburn-Atlantic analysts note that Yum! Brands has relied heavily on buybacks to boost its EPS growth since it spun off Yum! China in 2016. However, they expect that Yum! Brands will reduce its buybacks, pay down its debt, and face higher interest costs in a higher-for-longer environment.
Redburn-Atlantic analysts estimate that this will result in EPS that are 6% to 8% below the consensus expectations between FY24 and FY26. They add that Yum! Brands’ operational performance will not be affected by the capital structure changes.
Redburn-Atlantic analysts set a year-end 2024 price target of $115 for Yum! Brands, based on EV/EBITDA and P/E multiples of 14.6x and 18.6x, respectively. These multiples are in line with the prior 10- and 20-year average multiples, but below the premium multiples of the past five years.
Neutral at Redburn-Atlantic means: “The stock price will trade within the above ranges” – which appears to mean a range between breakeven and an under-15% gain, based upon their disclosure.
How did the stock react? After the premarket headline, published to InvestingPro users first, shares hammered down around $1.50 to a $118. As per usual, the hammer-down reversed before the regular-session open, only to slowly teeter on an unchanged price throughout the day. YUM closed Friday down about 50 basis points, or $0.61, to $119.95.
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