Is This Another Buying Opportunity In Lululemon?
My colleague Nick Vasco suggested Lululemon (NASDAQ:LULU) would be a good buy ahead of its 3Q earnings release and that thesis was sound even if share prices did not respond favorably. Price action has wallowed within a trading range and may move lower before moving higher. The underlying tailwinds that were cited as growth factors are still in play, however, and led the company to raise guidance for the 4th. With shares moving lower and guidance moving higher today's weakness could turn into tomorrow's buying opportunity.
The company sees Q4 results coming in at the high end of the previously issued range and even this estimated could be too low. Lululemon execs expect Q4 revenue growth at the high end of the mid to high-teens range they had previously issued. EPS is expected in the range of high-single digits. With the latest round of stimulus trickling through the economy and more on the horizon the company’s growth could easily accelerate to the high 20% range.
"We're pleased with the momentum over the holiday period as our investments in lululemon and MIRROR allowed us to connect with guests both physically and digitally. We remain confident about our opportunities in 2021 and committed to our Power of Three growth plan."
The Analysts See Opportunity Ahead Of The ICR Conference
Lululemon is among the many consumer-focused businesses presenting at the ICR Conference and the analysts are expecting big things. The updated guidance is only a sneak peek at what may come, many analysts such as JP Morgan are expecting the company to report double-digit gains above consensus for both revenue and earnings.
"We raise our 4Q SSS to +16.3% (w/ potential for incremental upside) equating to revenue growth of +24% (> Guide +Mid-to-HighTeens & Street at +18.8%), raising our 4Q EPS to $2.71 (> Street at $2.51)," says JP Morgan analysts Mattew Boss.
The average analysts rating has been a buy all year and the sentiment is getting stronger. Not only are new analysts getting on board with neutral/buy ratings but existing ratings are getting upgraded. At the same time, the consensus price target is rising and up more than 7.5% in the last 90 days, 260 bps of which were added since the 3Q report. The recent consensus is $382 and implies about a 5% upside for the stock. The most recent price targets, however, suggest shares should be trading closer to $400 or about 10% upside.
Lululemon Is Highly Valued But No Highly Enough
Lululeom is trading about 80X this year’s earnings which is certainly no value when compared to the broad market. The mitigating factor, however, is that this valuation is pricing in a growth outlook that is too low. The analysts are looking for a moderating CAGR in the mid-to-high teens and the new guidance plus outlook for 2021 belie that consensus. Add in the fact that the trend in consensus is on the rise and the valuation gets a little better. Looking forward, price-to-earnings will below 40X earrings in 2023 and reach a fairer valuation in-line with established peers by 2025.
The Technical Outlook: LULU Falls After Updated Guidance
Shares of LULU are down in premarket trading despite the updated guidance. The update, however positive, is a bit short of what some of the analysts were expecting. Wells Fargo, for one, was expecting a guidance update with revenue in the low 20% range. Regardless, shares appear to be well-supported within their recent trading range with little downside expected. Strong support is likely at the $340 level and even a move to $325 is possible without endangering the range. A move below $325 might change the outlook for share prices but only if the news supported such a change. In the absence of bad news and/or a move below $325, any move lower in share prices is a buying opportunity when support is confirmed.
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It turns out that there are actually 20 different companies that have been upgraded or had their price target increased at least ten times during the last ninety days by more than 10 different brokers. This slideshow lists those companies.
View the "20 Stocks Analysts Can't Stop Upgrading".