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Street Calls of the Week: Upgrade for Shake Shack; downgrade for Old Domion

Published 03/10/2024, 04:13 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 Shake Shack, G-III Apparel, Sea and Textron; downgrade for Old Dominion.

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

G-III Apparel Group

What happened? On Monday, Barclays downgraded G-III Apparel (NASDAQ:GIII) stock to Underweight with a $23 price target.

What’s the full story? Barclays’ downgrade is primarily driven by three factors: an anticipated 2% revenue headwind over a three-year period due to the announced Macy’s store closures on 2/27/24, the impact of lost licenses on the business over the next five years, and the subdued search interest in owned brands, suggesting a longer timeframe to counterbalance revenue headwinds.

The investment bank remains confident that GIII will continue to seek license agreements with new brands. However, there is limited visibility into potential agreements, their commencement, and whether they could sufficiently replace the lost Calvin Klein and Tommy Hilfiger businesses.

The analysts also believe that potential acquisitions beyond the core women’s and outerwear businesses could introduce additional execution risk.

Underweight at Barclays means “The stock is expected to underperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon.”

How did the stock react? GIII stock traded lower on the premarket headlines from $33.11 to $31.87, a decline of around 4.25%. GIII opened the regular session at $32.23 and closed at $29.73, a decline of 10.56%.

Sea Ltd.

What happened? On Tuesday, JPMorgan upgraded Sea Ltd (NYSE:SE) to Overweight with a $70 price target.

What’s the full story? JPMorgan believes that in the current competitive environment, SE is likely to continue increasing ecommerce commissions while reducing the intensity of sales and marketing spend. The investment bank anticipates that ecommerce will likely drive positive earnings revisions for SE in the near-term.

However, the analysts also caution that the high take-rates could result in volatility in earnings expectations with changes in the competitive environment. This volatility in earnings outlook is likely to result in fluctuations in share price. JPMorgan recommends investors to trade these changes in earnings outlook. They believe earnings expectations are likely to see positive revisions in the near-term, driven by ecommerce.

Overweight at JPMorgan means “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? Sea Ltd. equity traded up on the premarket headline from $53.62 to $54.50. Investing.com Pro users had the information 5 minutes before other outlets reported it. Sea Ltd. opened the regular session at $54.32 and closed at $55.75, a gain of 3.43%.

Old Dominion

What happened? On Wednesday, BofA downgraded Old Dominion (NASDAQ:ODFL) to Neutral with a $446 price target.

What’s the full story? BofA’s downgrade is based upon limited upside to their price objective (PO) citing an elevated multiple and lagging volume growth. The investment bank has increased its PO to $446 from $443, based on 35.5x their 2024 EPS estimate, reflecting better-than-expected pricing from its mid-1Q24 update and earnings leverage as demand returns. Despite lowering their 2024 and 2025 EPS estimates each by 1% to $12.55 and $14.65 respectively, due to lower volume estimates,

BofA remains positive on leading carriers given the tight Less-than-Truckload (LTL) backdrop and potential earnings leverage as demand returns.

The analysts note that Old Dominion has distinguished itself as a best-in-class operator in the LTL segment of the trucking industry, increasing revenue and EPS at rates above the industry average and improving its operating ratio to an industry-best level. They believe ODFL can continue to gain market share given its high service levels. However, they view its upside as limited given its premium valuation multiple.

Neutral at BofA means “Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks.”

How did the stock react? Old Dominion opened the regular session at $430.15 and closed at $435.46, a gain of 1.25%.

Shake Shack

What happened? On Thursday, TD Cowen upgraded Shake Shack (NYSE:SHAK) to Outperform with a $125 price target.

What’s the full story? TD Cowen anticipates multi-year positive adjusted EBITDA revisions for Shake Shack, driven by an upside to 2024-26E restaurant level margins and G&A (General and Administrative expense). The investment bank believes that the brand’s multi-pronged efficiency efforts and disciplined investing are underappreciated, and these factors are expected to drive positive EBITDA revisions.

Simultaneously, the hiring of a new CEO ushers in a narrative change and presents opportunities to improve traffic as the brand leverages its scale to embrace the next phase of the business curve.

The analysts increase their price target to $125 and designate shares as their top small to mid-cap and second overall pick. TD believes the hiring of a capable new CEO can help accelerate traffic, driving multiple expansion through upgraded marketing & operations, and progressing on the brand’s digital journey. The analysts argue that Shake Shack should trade at a premium to the 5-year average EV/EBITDA multiple, similar to fast casual peers.

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

How did the stock react? Shake Shack opened the regular session at $100.96 and closed at $104.44, a gain of 3.45%.

Textron

What happened? On Friday, BofA upgraded Textron (NYSE:TXT) to Buy with a $105 price target.

What’s the full story? BofA’s valuation is rolled forward to use 2025 estimates, arriving at the PO by using a 0.90x relative P/E multiple (vs. prior 0.85x) to the 2025e market multiple. BofA wrote their higher multiple accounts for stronger Aviation performance despite the post-COVID demand decline, efforts to consolidate costs at Industrial, and a robust Systems pipeline that should materialize in stronger outyear growth. However, the relative multiple remains below the historical average of 0.95x due to perceived risks to Bell given its aging portfolio and possible budgetary cuts to the Future Vertical Lift (FVL) program.

The analysts believe Textron Aviation remains well positioned to benefit from further growth in business jet demand and swelling industry backlogs. Bell is seen as positioned to benefit from improving commercial helicopter demand, and the Future Long Range Assault-Aircraft program development.

Textron Systems is expected to benefit from increasing domestic and international defense budgets. Textron’s strong balance sheet sets the scene for continued shareholder-friendly capital deployment through dividends and share buybacks according to BofA analysts.

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? TXT equity traded up on the premarket headlines from $90.28 to $92.05, a gain of 1.45%. Textron opened the regular session at $93.16 and closed at $92.13, a gain of 2%.

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