Grocery Outlet Downgraded at Morgan Stanley – ‘Priced for Perfection’
2022.08.23 19:26
Grocery Outlet (GO) Downgraded at Morgan Stanley – ‘Priced for Perfection’
By Sam Boughedda
A Morgan Stanley analyst downgraded shares of Grocery Outlet Holding Corp. (NASDAQ:GO) to Underweight from Equal-Weight, raising the firm’s price target on the stock to $33 from $29 per share.
The analyst said the stock is not quite perfect, “but priced for perfection.” Shares of Grocery Outlet fell more than 5% Tuesday.
“Our downgrade is based on two factors. First, there is downside to ’23 estimates (and not as much upside to ’22 as the stock is discounting). Second, following the stock’s outperformance year-to-date (+48% vs. S&P 500 -13%), current valuation at ~18x NTM EV/EBITDA screens high relative to our coverage. Our supplementary long-term DCF points to a fair value of ~$31 relative to the stock’s current price of ~$42,” wrote the analyst.
However, the analyst made clear that the downgrade is not based on a structural view of the company’s fundamentals and it “seems priced for perfection, which drives a negative risk/reward skew and ~20% downside to our $33 PT (up from $29 post Q2 results).”
“We would look to get more positive on a pullback in the stock. Our $33 PT is based on ~16x our adj. ’23e EBITDA of $218m (or ~36x our ’23e EPS of 90c, which includes stock-based compensation). This multiple values GO at a modest discount to its pre-COVID average in the high teens, but above where it traded for much of ’21 in the low teens. It’s also slightly above other high growth retailers (FIVE, FND, EYE, and OLLI trade at ~15x on average) and values GO close to our DCF-implied fair value,” added the analyst.
