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5 Huge Analyst Calls: Adobe, Marvell Boosted on AI Hopes; Urban Outfitters slashed

Published 08/20/2023, 09:41 PM
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Here is your Pro Recap of the top takeaways from Wall Street analysts for the past week: upgrades for Hexcel, Callon Petroleum, Adobe, and Marvell, and a downgrade for Urban Outfitters.

InvestingPro subscribers always get news like this first. Never miss another market-moving upgrade.

Urban Outfitters downgraded at Citi

What happened? On Monday, Citi downgraded Urban Outfitters (NASDAQ:URBN) to Neutral with a $40 price target.

What’s the full story? Citi downgrades URBN citing high market expectations and slow turnaround of its eponymous UO brand. The analyst expects a material Q2 EPS beat and above-consensus Q3 guidance, and buffers that bullish implication with some caution when noting the stock has limited upside beyond Citi’s $40 price target. The analyst also highlights recession risks, margin pressures, and balance sheet leverage as potential challenges for URBN.

Neutral at Citi is defined as follows: “Any covered stock not assigned a Buy or a Sell is a Neutral.”

How did the stock react? Shares of URBN slid 2.5% on the headline during premarket trading, dropping nearly $1 from $36.41 to $35.50. URBN opened the regular session at $36.07 and closed at $36.39, down 0.05% from the prior close.

Hexcel upgraded at RBC

What happened? Early morning on Tuesday, RBC Capital upgraded Hexcel Corp (NYSE:HXL) to Outperform with an $85 price target.

What’s the full story? According to RBC Capital, HXL stock has lost some 8% since reporting its Q2 results. Over the same period, the entire aerospace & defense sector sector retreated about 1%.

The analyst believes HXL is a high-quality aerospace stock with underappreciated upside potential to its free cash flow (FCF). RBC Capital's confidence in 2024-2025 rate increases is improving. HXL stock is back to about 80% of its pre-pandemic peak (compared to roughly 90% for its peers) and is on pace to surpass its prior peak margins in 2025. RBC Capital currently models ~18% aerospace growth in 2024 and 2025, respectively. For the A350 model, they model an improvement in sales from 6 per month to 7 per month in the first half of next year (could be sooner but not implied in the 2023 guide).

The analyst believes the aero supply chain is stabilizing, but that it continues to present risk to the pace of production increases. RBC Capital has incremental confidence in the higher margins and FCF performance on its conservative build rate assumptions. It estimates operating margins will hit 17% in 2025 on $2.3B in sales (their model assumes 30% incremental margins in 2024-2025). And it believes many of the 2022 and 1H23 margin headwinds (labor, energy, materials, logistics) should become meaningful tailwinds in 2024.

With leverage at 2x, investor focus is shifting to capital allocation, which RBC Capital believes will be a positive catalyst. Its 2025 FCF estimate is $320 million (note HXL generated FCF of $287M in 2019 with capital expenditures of ~$200M), ahead of consensus. While it expects management to remain opportunistic with mergers and acquisitions (they see smaller deals as more likely), even assuming ~$250M in incremental buybacks through 2025, RBC's model supports an additional ~$300M in capacity, assuming just 1.5x leverage.

The lack of clear-sheet aircraft programs should enable HXL to spend under $100M in capex through 2025. Note capex averaged $260M in 2015-2019. RBC Capital’s $85 price target is based on a 22x multiple applied to its 2025 FCF estimate. In 2017-2019 HXL traded at an average FCF multiple of 25x. While RBC's model does not assume a full return to pre-pandemic peak revenues and margins until after 2025, the analysts believe that as visibility in the FCF upside improves, sentiment on the stock will benefit.

Outperform at RBC Capital means: “Expected to materially outperform sector average over 12 months."

How did the stock react? Shares rose meaningfully in the premarket, but slid during the regular session to $69, fractionally lower than Monday's closing price.

Callon Petroleum upgraded at Citi

What happened? On Wednesday, Citi upgraded Callon Petroleum (NYSE:CPE) to Buy with a $45 price target.

What’s the full story? Citi analysts have revised their outlook on CPE, expecting it to close the valuation gap with peers of similar scale. The analysts cite the opportunity for strong drilling results on the acquired Percussion acreage and the credit for the strategic moves made in recent months.

Further, Citi expects the share buyback program to start soon and for the inventory picture to become clearer as the company's Midland development strategy progresses. Citi believes that CPE will apply its experience and expertise to the legacy Percussion acreage and produce better drilling results than what the market expects. The analysts also expect CPE to capture a meaningful portion of this opportunity over the next 12-18 months, which should position it for growth in 2024 and upside pressure later this year.

Lastly, Citi analysts are also comforted by their deflationary expectations as operational cost savings improve margins in late 2023 and 2024.

Buy at Citi is defined as equity total return (ETR) "of 15% or more or 25% or more for high risk stocks”

How did the stock react? Shares spiked higher by about $0.30 to $35.86 around 5:03AM as the headline was pushed. CPE shares ended the day down 0.5%, closing at $35.37.

Adobe upgraded at BofA

What happened? On Thursday, Bank of America upgraded Adobe (NASDAQ:ADBE) to Buy with a $630 price target.

What’s the full story? According to BofA, Adobe is emerging as a leader in artificial intelligence (AI). It says the company's AI offerings, such as the generative AI-powered content creation tool Firefly, are likely to begin driving meaningful revenue/FCF upside as soon as FY24.

BofA sees three potential AI monetization opportunities:

1) a paid Firefly subscription;

2) credit packs for Firefly consumption; and

3) custom agreements with global brands to blend data/LLMs with Adobe’s.

In a conservative base case, BofA arrives at AI revenue of $300 million in fiscal 2024, growing to $960 million by 2026 (which assumes Firefly penetration of 18% to the Creative Cloud/Express installed base). In a blue-sky scenario, BofA arrives at AI revenue of $1B in FY24, growing to $2.9B by fiscal 2026 (which assumes 33% Firefly penetration to Creative Cloud/Express users).

The revised $630 price target is 27x their calendar 2025E FCF (1.9x adjusted for a +14% 3-year FCF compound annual growth rate [CAGR]). The new 27x 2025E FCF multiple represents a premium to the GARP software group (trading at 1.3x 17% FCF growth) to reflect potential acceleration from AI. If BofA includes incremental FCF from AI (in its mid-case estimate), their price objective would represent 25x estimated 2026E FCF.

Buy at BofA is defined as follows: “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? Shares instantly spiked about 2% or $12 to $526 on the headline, and opened near that level, but gave back all of those gains to close down 0.6% to $511.67.

Marvell Technology upgraded at B. Riley

What happened? On Friday, B. Riley upgraded Marvell Technology (NASDAQ:MRVL) to Buy with a $75 price target.

What’s the full story? B. Riley is returning to MRVL to positively update its investment thesis for an expected wave of AI-led growth, increasing the price target from $60 to $75, and upgrading shares from Neutral back to Buy.

The rating context is that, following a six-year positive stance, hyper-scale spending intensity and revenue growth deceleration concerns moved the analyst to the sidelines. However, Marvell's recent tally of super-seven hyper-scale capex shows a first in three-quarter 2024E spending rise, and while enterprise-related inventory headwinds linger, B. Riley believes they are moderating. So, the backdrop is improving for MRVL.

On company-specific growth, B. Riley had previously viewed MRVL as one of the industry’s best growth stories, and then in late May, it outlined an expected AI-related 4x fiscal 2022-2024 revenue surge to $800M, while Data Center’s Cloud products offer a strong growth complement.

Beyond that, the analyst believes an eventual Enterprise Networking and Storage assist are likely in 2024 even as other smaller drivers kick in. So, a new and powerful phase of growth seems at hand. Fresh self-help benefits can boost margins and operating cash flow.

For shares, while B. Riley has missed May’s cyclical lows, history’s two prior waves of positive change since 2016 averaged a five-fold stock surge, and while the analysts do not expect that, they believe the coming AI and cloud-led wave sets up potent multiyear financial gains and strong 12-month share outperformance ahead. Into Thursday's earnings print, B. Riley expects at least an in-line Q2 and guidance, noting lingering enterprise storage risks.

Marvell's 56% year-to-date share gain (at the time of B. Riley's report) leads a 37% rise in the Philadelphia Semiconductor Index, but it trails HPC peers Advanced Micro Devices Inc (NASDAQ:AMD) at 63% and Nvidia's (NASDAQ:NVDA) at 199%, and recovers about half of the stock's unusually severe decline in 2022. The stock's consensus price-to-earnings ratio of 25.0x matches that of AMD but is 10 percentage points below Nvidia's.

A buy at B. Riley is defined as follows: “We generally expect 'Buy' rated stocks to have an above-average risk-adjusted total return over the next 12 months. We recommend that investors buy the securities at the current valuation.”

How did the stock react? Shares barely saw any recognizable asset appreciation with the stock gaining a mere 0.05% on the session to close at $57.59.

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