Every day, Wall Street analysts upgrade some stocks, downgrade others, and “initiate coverage” on a few more. But do these analysts even know what they’re talking about? Today, we’re taking one high-profile Wall Street pick and putting it under the microscope…
It’s been a good week to own Kohl’s (NYSE:KSS) stock, no doubt about it. Kohl’s shares that had already gained 56% in 12 months at the time scored an immediate 6% gain on Monday after the retailer reported strong same-store sales for its November-December “holiday period.” On Thursday, investment banker Piper Jaffray piled onto the Kohl’s train with a price target hike (albeit to only $55, which is below the shares’ current cost).
This morning the final bit of good news rolled in, when StreetInsider.com (requires subscription) reported that both RBC Capital and JPMorgan have upgraded Kohl’s stock. Here are three things you need to know about that.
1. What’s new with Kohl’s this year
Let’s begin with the sales report that came out this week. On Monday, Kohl’s reported that its sales in November and December jumped 6.9% in comparison to the same period last year. What’s more, “all lines of business and all regions” improved. And in cyberspace, Kohl’s appears to be regaining ground lost to Amazon.com, with “growth in digital demand accelerat[ing] significantly.”
Based on these results, Kohl’s was able to raise its earnings guidance for the entirety of fiscal year 2017. Management now expects to report earnings of $4.10 to $4.20 per share when full-year results come out (probably in late February).
2. Color RBC impressed
Crunching the numbers on Monday, I observed that the stock’s valuation still looked attractive, and predicted that “there’s still time for investors to snap up a bargain in Kohl’s stock.” Now it appears that Wall Street agrees.
This morning, RBC Capital praised Kohl’s for producing “sequentially improving comps through 2017 which culminated in +7% comp for the Holiday period.” At the same time, RBC noted that Kohl’s management is making progress in “optimiz[ing its] store fleet,” cutting costs, and improving its balance sheet.
I’m honestly not sure what they’re referring to with that last point. According to data from S&P Global Market Intelligence, Kohl’s debt levels haven’t moved meaningfully in four years, while the company’s cash balance has actually shrunk. On the other hand, Kohl’s has made progress in whittling away at its selling, general, and administrative (SG&A) spending over the past two years.
Still, Kohl’s isn’t entirely out of the woods yet. SG&A spending is down about 1% over the past couple of years — but sales are still down 4%. Perhaps this is the reason RBC remains cautious about Kohl’s, and is upgrading the stock only to sector perform.
3. JPMorgan goes all in
Not so JPMorgan. Going a step further than RBC, this morning JPMorgan announced it is upgrading Kohl’s shares all the way to overweight and assigning a $72 price target that suggests there’s still 13% upside in Kohl’s stock.
JPMorgan even goes so far as to declare Kohl’s a “rare large cap ‘value’ idea.” According to the analyst, Kohl’s customer demographic centering on households earning between $75,000 and $80,000 annually, its store locations outside of malls, and its efforts to grow foot traffic and cut costs could generate “multi-year high-single to low-double-digit EPS” growth. More than just 13% upside this year, JP Morgan is predicting that between earnings growth and dividends, Kohl’s stock could deliver a “low-double to mid-teens total return” for investors over the next several years.
Is JPMorgan right about that? Or should investors follow the somewhat more cautious neutral endorsements from Piper Jaffray and RBC Capital, and sit on the sidelines awaiting a pullback in Kohl’s stock price?
With the stock up nearly 50% over the past year — and up 17% over just the past week — that call is getting harder and harder to make, but here’s how I look at it: With $644 million in net income, about $1 billion in trailing free cash flow, and an enterprise value (that’s Kohl’s market capitalization, minus its cash but plus its long-term debt) of $14.1 billion, Kohl’s stock now sells for nearly 22 times trailing earnings, and more than 14 times trailing FCF.
Even with Kohl’s market-beating 3.7% dividend yield, that’s a high price to pay for a stock that most analysts still see growing profits at just 8% annually. My instincts tell me that most of the easy money in Kohl’s stock has already been made. By the time an analyst shop like JPMorgan has twigged to the fact that Kohl’s was once a deep value stock, it’s already time to move on and find the next bargain.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN. The Motley Fool has a disclosure policy.