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Street Calls of the Week: Upgrade for Nike; downgrade for Arista Networks 

Published 04/14/2024, 03:29 AM
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Investing.com — Here is your Pro Recap of the top takeaways from Wall Street analysts for the past week: upgrades for Ulta Beauty (NASDAQ:ULTA), American Eagle Outfitters (NYSE:AEO), CAVA Group, and Nike (NYSE:NKE); downgrade for Arista Networks (NYSE:ANET).

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Ulta Beauty

What happened? On Monday, Loop Capital upgraded Ulta Beauty to Buy with a $540 price target.

What’s the full story? The brokerage firm considers the recent market downturn to be an overreaction, especially in light of Ulta Beauty’s challenging comparison in the first quarter of fiscal 2024. Loop forecasts a rebound in Ulta’s fortunes throughout the remainder of the fiscal year, spurred by more favorable year-over-year comparisons and the launch of new products.

The analysts also drew attention back to a strategic advantage in Ulta Beauty’s stock repurchase at reduced prices, which is expected to contribute to greater EPS growth. Furthermore, Loop Capital anticipates that the initiation of a regular cash dividend (who doesn’t love dividends?) by Ulta Beauty could act as a significant positive trigger for the stock’s value.

The firm’s price target is anchored on a multiple of 20.3x the forecasted diluted EPS for FY24, consistent with Ulta Beauty’s historical median figures.

Buy at Loop Capital means “The stock is expected to trade higher on an absolute basis or outperform relative to the market or its peer stocks over the next 12 months.”

How did the stock react? Ulta Beauty stock traded higher on the premarket headline from $444.65 to $448.80, a gain of around 0.91%. It opened the regular session at $454.22 and closed at $452.78, a gain of 1.81%.

American Eagle Outfitters

What happened? On Tuesday, JPMorgan upgraded American Eagle Outfitters to Overweight with a $31 price target.

What’s the full story? JPMorgan recently hosted a meeting with American Eagle Outfitters’ executives, including EVP & CFO Mike Mathias, SVP Investor Relations & Corp. Communications Judy Meehan, and Sr. Director, Investor Relations Shirley Martin. The management team expressed optimism about the momentum across both AE and Aerie brands. They have embedded a multi-year conservatism in their 3-year financial plan, projecting a consolidated revenue growth of 3-5% and a mid-to-high-teens operating income growth.

Notably, Aerie’s revenue growth is assumed to be in the mid-to-high single digits, below its historical double-digit CAGR. Despite the visibility to product cost favorability through Holiday '24 and ongoing AUR/brand mix benefits, product margins are assumed to remain flat.

The analysts have upgraded American Eagle to Overweight with a December '24 price target of $31, based on 15x their FY25 EPS, which equals a 1x PEG to their FY24/25 EPS growth, or 6.7x their FY25 EBITDA. This is above American Eagle’s 3-year pre-pandemic average of 5.3x, supported by FY25 operating margins that are approximately 200bps higher than pre-pandemic levels.

Overweight at JPMorgan means “Overweight (over the duration of the price target indicated in this report, we expect this stock will outperform the average total return of the stocks in the Research Analyst’s, or the Research Analyst’s team’s, coverage universe).”

How did the stock react? American Eagle stock traded higher on the premarket headline from $24.42 to $25.45, a gain of around 3.8%. It opened the regular session at $25.37 and closed at $24.40, a decline of 0.08%.

CAVA Group

What happened? On Wednesday, Argus upgraded CAVA Group to Buy with a $70 price target.

What’s the full story? Argus has upgraded its rating on CAVA Group to BUY from HOLD, signaling confidence in the company’s potential within the fast-casual dining sector. Specializing in Mediterranean cuisine, CAVA Group is well-positioned to capitalize on market opportunities in its niche and the broader industry. The analysts highlight the company’s profitable operations, solid financials, and seasoned leadership as key strengths. With a projected long-term growth rate of 20%, Argus sees a promising future for the company.

Despite CAVA’s recent entry into the public market, making historical valuation comparisons less relevant, Argus finds the company’s valuation metrics to present a mixed picture when juxtaposed with industry peers. The price-to-earnings ratio stands at 200x the estimated 2025 EPS, surpassing the average of 120 among competitors like CMG, SHAK, and SG. However, CAVA’s price-to-sales ratio of 5.7 trails behind that of sector leader CMG. Not for nothing, Argus perceives the recent market dip as an opportune moment for investors to buy into a high-growth stock at an early stage, setting a target price of $70.

Buy at Argus means “A BUY-rated stock is expected to outperform the S&P 500 on a risk-adjusted basis over a 12-month period. To make this determination, Argus Analysts set target prices, use beta as the measure of risk, and compare expected risk-adjusted stock returns to the S&P 500 forecasts set by the Argus Market Strategist.”

How did the stock react? CAVA Group stock traded higher on the premarket headline from $60.15 to $61.10, a gain of around 1.0%. CAVA opened the regular session at $64.25 and closed at $66.38, a gain of 4.22%.

Nike

What happened? On Thursday, BofA upgraded Nike to Buy with a $113 price target

What’s the full story? BofA has elevated Nike’s status to Buy from Neutral, as the company’s financial forecasts are now within reach, and its transformation efforts are in full swing. The stock is currently valued at a 10-year low in terms of relative price-to-earnings (P/E). With consensus estimates for Fiscal Year 2025 (F25) having decreased by 35% over two years and the P/E multiple 10 points below its five-year average, BofA’s analysis suggests mid-single-digit revenue growth and improved margins. The current 20 times Fiscal Year 2026 (F26) P/E ratio, which is 1.1 times relative, is seen as an attractive entry point.

The analyst's new $113 price target for Nike is based on a 25 times F26 P/E ratio, down from the previous 27 times. This adjustment to a 1.2 times relative multiple is believed to better represent Nike’s growth potential. Anticipation is building for Nike’s first Investor Day in seven years, scheduled for this fall, where a revised long-term growth algorithm is expected. With a history of leveraging Olympic events for marketing and innovation boosts, Nike is predicted to follow suit this year, potentially leading to a resurgence in growth fueled by new product introductions and strategic changes within the organization.

Buy at BofA means “Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster.”

How did the stock react? Nike stock traded higher on the premarket headline from $89.03 to $91.18, a gain of around 2.50%. Nike opened the regular session at $91.00 and closed at $92.00, a gain of 0.11%.

Arista Networks

What happened? On Friday, Rosenblatt double downgraded Arista Networks to Sell with a $210 price target

What’s the full story? Rosenblatt has observed that Arista’s strengths may not be as effective in the AI market. Arista, with approximately 30% Data Center Switch (NYSE:SWCH) market share and over 40% in 400G, has historically relied on the network architecture expertise of its founder and its Extensible Operating System software. EOS has proven beneficial for general Cloud applications due to their variety. However, Rosenblatt’s industry conversations suggest that EOS may not be as compelling for AI, which tends to repeat the same application.

The brokerage house summarizes this by stating that AI requires RDMA (remote direct memory access), not an extensible operating system. In Rosenblatt’s view, Nvidia (NASDAQ:NVDA) has taken the lead in Data Center architecture vision. While Arista will continue to compete with Cisco (NASDAQ:CSCO) in Enterprise, Nvidia has emerged as the primary Data Center competitor, possessing significant advantages over Arista.

Sell at Rosenblatt means “We believe this stock will underperform relative to other companies in its industry over the following 12 months.“

How did the stock react? Arista networks stock traded lower on the premarket headline from $296.82 to $290.11, a decline of around 2.22%. It opened the regular session at $281.15 and closed at $271.22, a decline of 8.54%.

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