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Street Calls of the Week: Compass downgrade - risk greater than reward

Published 02/25/2024, 04:06 AM
Updated 02/25/2024, 04:06 AM -- Here is your Pro Recap of the top takeaways from Wall Street analysts for the past week: upgrade for Coty, downgrades for Alkermes, Compass and Boeing.

InvestingPro subscribers always get first dibs on market-moving rating changes.

Monday - US Markets Closed

Alkermes downgraded

What happened? On Tuesday, UBS downgraded Alkermes (NASDAQ:ALKS) to Sell with a $25 price target.

What’s the full story? Despite the stock trading close to its 52-week high, ubs perceives negative risk/reward stemming from pipeline updates and launch performance. The current stock valuation implies approximately $2.2 billion in 2029 estimated sales (compared to their base case of $1.6 billion), suggesting high expectations for orexin clinical outcomes and robust Lybalvi growth. However, caution surrounds ALKS’ orexin Phase 1 read-out expected during the first half of 2024, with anticipated Lybalvi misses and potential consensus downward revisions. Specifically:

ALKS-2680 (orexin) is likely to exhibit significant tolerability issues at higher doses in the Phase 1 study for narcolepsy type 2 (NT2) and Idiopathic Hypersomnia.

Lybalvi growth, while solid, is showing signs of tapering, leading to UBS’s FY24-27E sales estimate being approximately 12% below consensus.

Sell at UBS means “Forecast Stock Return (FSR) is > 6% below the Market Return Assumption (MRA).”

How did the stock react? ALKS equity traded lower on the premarket headlines from $32.39 to $34.18, a decline of 2.18 percent. Alkermes opened the regular session at $31.04 and closed at $30.39, a decline of 5.58 percent.

Compass downgraded

What happened? On Wednesday, Gordon Haskett downgraded Compass (NYSE:COMP) to Underperform with a $2.25 price target.

What’s the full story? Gordon Haskett has downgraded Compass shares from Hold to Underperform. This decision comes in light of several factors. Firstly, Compass shares have been significantly outperforming their peers year-to-date. Secondly, the company has been named in multiple commission lawsuits, with recent Department of Justice involvement that could potentially disrupt the traditional agent commission model. This could prove detrimental to Compass’s business, with approximately 55% of transactions coming from buy-side transactions.

The brokerage’s research indicates transaction and Gross Transaction Value (GTV) shortfalls in the fourth quarter, and consensus estimates appear aggressive looking ahead to the first quarter. Furthermore, the rate lock is expected to persist and weigh on housing demand well into 2024. A significant portion of the positive adjusted EBITDA for the foreseeable future is accounted for by stock-based compensation.

Citing these factors, the analysts see the risk as greater than the reward. Consequently, they have downgraded the shares to Underperform and lowered their price target to $2.25 from $2.75, indicating a 38% downside.

Underperform at Gordon Haskett means “We expect the stock’s TSR to Underperform the relevant broad market benchmarks by greater than 10%.”

How did the stock react? COMP equity traded lower on the premarket headlines from $3.52 to $3.30, a decline of 4 percent. Compass opened the regular session at $3.50 and closed at $3.49, a decline of 4.38 percent.

Coty upgraded

What happened? On Thursday, TD Cowen upgraded Coty (NYSE:COTY) to Outperform with a $16 price target

What’s the full story? TD Cowen has upgraded COTY to a Buy rating after a fireside chat with its Chief Brands Officer and a presentation at CAGNY (Consumer Analyst Group of New York). The brokerage cites COTY’s strong performance in fragrances (~55% of sales in prestige segment) as a key factor, as well as its opportunities to diversify and “premiumize” its products across regions and categories.

TD Cowen’s analysts also praise COTY’s efforts to modernize its Consumer Beauty division (mass brands, 38% of sales in FY23), which has high potential but needs improvement. They also note COTY’s robust cash flow and margin expansion potential compared to its peers, driven by higher exposure to prestige and Asia markets and cost saving initiatives.

Lastly, TD Cowen analyst see a valuation gap between COTY (~22x FY2 P/E) and its global beauty peers (~32x FY2 P/E), which they expect to narrow as COTY grows its business

Outperform at TD Cowen means “The stock is expected to achieve a total positive return of at least 15% over the next 12 months .”

How did the stock react? COTY equity traded higher on the premarket headlines from $12.63 to $12.99, a gain of 2 percent. Coty shares opened the regular session at $13.04 and closed at $12.97, a gain of 2.61 percent.

Boeing downgraded

What happened? On Friday, Northcoast downgraded Boeing (NYSE:BA) to Neutral without a price target.

What’s the full story? Northcoast downgraded Boeing shares citing Murphy’s Law and expressing concern about limited earnings visibility, the lack of identifiable trading catalysts, and new dents found in certain long-term drivers. The brokerage’s proprietary channel checks and recent headlines have left them with a minimal degree of confidence in revised estimates. The analysts question how much potential bad news is already reflected in the current valuation.

Investors ought to expect a six to nine-month earnings recovery delay according to Northcoast, which could relegate BA shares to a prolonged “low-altitude holding pattern”. Absent a significant change in the BA narrative, the analysts foresee continued commercial aircraft production instability, the risk of further market share erosion, delayed introduction and/or certification of new products, and diminished management credibility.

Citing these factors, Northcoast prefers alternative aerospace investment options, such as the global suppliers levered to aftermarket demand or wide-body aircraft production. This downgrade reflects their concern about the current and future state of Boeing.

Neutral at Northcoast means “The stock is expected to perform in-line with the S&P 500 index over a twelve-month period.”

How did the stock react? BA equity traded lower on the premarket headlines from about $201.50 to $200.50 before rebounding entirely as premarket scalpers played their order routing games. Boeing opened the regular session at $200.92 and closed at $200.83, a decline of 0.33 percent.

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