Wells Fargo has downgraded apparel company VF Corp. (NYSE: VFC) from Equal Weight to Underweight, setting a new price target of $15.00.
The firm expressed concerns about the company's current valuation, suggesting that the market's expectations for profit margins over the next few years are excessively optimistic.
The analyst pointed out that the market is factoring in a significant margin increase for VF Corp. from the current 4-4.5% to over 10% within the next 2.5 years, along with EBITDA multiples returning to more than 10 times.
These projections are viewed as overly ambitious by Wells Fargo, which instead considers a margin of 6-8% on an 8-9x EBITDA multiple as a more reasonable forecast by the fiscal year 2027, suggesting a valuation between $14 and $15.
Wells Fargo's evaluation also took into account the company's underperformance in the near term, which complicates the valuation process. The firm's revised price target of $15 is based on an analysis that includes an expected improvement in profit margins to 7-9% by the fiscal year 2025, assuming an EBITDA multiple of 8-9 times, and a long-term margin of over 10% in their five-year discounted cash flow (DCF) model.
In other recent news, VF Corp has made significant strides in its financial strategy, highlighted by the recent sale of its Supreme brand for $1.5 billion. This move has not only enabled VF Corp to pay down debt but also refocuses the company's attention on revitalizing its core brands. Goldman Sachs, while reinstating a Neutral rating for the company, anticipates a potential resurgence of the Vans brand, particularly with the appointment of Ms. Sun Choe as the new brand president.
Various analyst firms have provided mixed views on these developments. Jefferies initiated coverage on VF Corporation (NYSE:VFC) with a hold rating and a $20 target price, while Barclays upgraded the company to Overweight from Equal-weight and increased its price target to $22. Conversely, BMO Capital maintained its Market Perform rating with a steady price target of $14, and Williams Trading reiterated its sell rating with a steady price target of $10.
Despite the divestiture, VF Corporation has maintained its Q2 outlook, forecasting a modest revenue decline, a slight increase in gross margin, and a minor rise in SG&A expenses. Additionally, the company has announced additional cost savings of $50 million in Q1 of fiscal year 2025.
InvestingPro Insights
Recent data from InvestingPro provides additional context to Wells Fargo's downgrade of VF Corp. (NYSE:VFC). Despite the analyst's cautious outlook, VFC has shown a strong return over the last three months, with InvestingPro data revealing a 48.62% price total return in that period. This recent performance contrasts with the company's financial challenges highlighted in the article.
InvestingPro Tips indicate that VFC's stock price movements are quite volatile, which aligns with the significant recent gains and the analyst's concerns about valuation. Additionally, the company has maintained dividend payments for 54 consecutive years, demonstrating a long-term commitment to shareholder returns despite current profitability issues.
It's worth noting that while Wells Fargo expresses concern about VFC's profit margins, InvestingPro data shows a gross profit margin of 51.9% for the last twelve months as of Q1 2023. However, the operating income margin stands at a much lower 5.43%, supporting the analyst's view on the company's current financial state.
For investors seeking a more comprehensive analysis, InvestingPro offers 8 additional tips for VFC, providing a broader perspective on the company's financial health and market position.
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