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Street calls of the week: Micron downgrade, upgrade for Kroger

Investing.com -- Here is your Pro Recap of the top takeaways from Wall Street analysts for the past week.

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

Ollies Bargain Outlet

What happened? On Monday, JPMorgan upgraded Ollie's Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) to Overweight with a $105 price target.

JPMorgan projects a favorable near-term outlook for OLLI, bolstered by a robust closeout deal environment, an enhanced competitive landscape, and steadfast execution that collectively contribute to the growth of same-store sales. Looking ahead, the investment bank anticipates a significant acceleration in “organic” unit growth, expecting it to reach double digits by FY25 and beyond. This growth trajectory is based on a 10-year plan to achieve a store count of 1,300, which is the estimated point of market saturation. This expansion is predicted to drive a compound annual growth rate of approximately 13% in Earnings Per Share, rooted in low-single-digit increases in same-store sales.

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Additionally, the potential for lateral consolidation offers additional opportunities for wallet-driven enhancements to same-store sales and unit growth, which are not currently factored into JPMorgan’s model.

The investment bank maintains that there are no structural barriers to returning to the pre-pandemic unit growth rates of 13-14% over multiple years. This optimistic assessment is reflected in JPMorgan’s rating of OLLI as Overweight, indicating confidence in the company’s potential for sustained growth and profitability in the coming years. The bank’s analysis suggests that OLLI is well-positioned to capitalize on both organic expansion and strategic consolidation to bolster its market presence and financial performance.

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? Ollies Bargain Outlet opened the regular session at $90.55 and closed at $95.98, a gain of 9.43% from the prior day’s regular close.

Kroger

What happened? On Tuesday, BMO Capital upgraded Kroger (NYSE:KR) to Outperform with a $60 price target.

BMO Capital analysts have observed a pullback in the stock market, attributing it to apprehensions about rising price investments within the industry. These investments are thought to be primarily funded by vendors, with a smaller portion being covered by retailer promotions. The analysts are optimistic about the first quarter internal deliveries, enhancing their forecast to 0.8% from the previous 0%. This is based on the assumption of a 0.6% year-over-year increase in gross profit excluding fuel, consistent cents per gallon at 45, and a favorable last-in, first-out accounting impact of approximately $90 million. Consequently, they anticipate an earnings per share of $1.46, surpassing the consensus estimate of $1.35. This projection suggests that Kroger could potentially achieve the upper end of its Fiscal Year 2025 guidance.

Furthermore, BMO Capital’s full-year Fiscal Year 2025 earnings forecast presumes an almost unchanged gross margin percentage excluding fuel and stable retail fuel CPGs. With the stock trading at approximately 11 times the consensus EPS of $4.54, the analysts believe it reflects a fair assessment of the potential downside risks to EPS. They maintain that Kroger’s gross margin outlook appears more secure than previously anticipated.

Additionally, BMO analysts foresee a favorable outcome regardless of whether a deal is made or not. As a result, BMO Capital has increased its Fiscal Year 2025 EPS estimate to $4.49 (up from $4.40), Fiscal Year 2026 EPS to $4.65 (up from $4.60), and set a target price of $60, applying a 13x multiple to the two-year forward P/E ratio, which was previously between 12x and 13x.

The primary risk identified by the analysts is the potential for price investments driven by an intensifying competitive environment in the food retail sector.

Outperform at BMO Capital means “Forecast to outperform the analyst’s coverage universe on a total return basis.”

How did the stock react? Kroger opened the regular session at $52.52 and closed at $51.98, a gain of 1.82% from the prior day’s regular close.

Wednesday - US Markets Closed for Juneteenth

Irhythm Technologies

What happened? On Thursday, Wolfe Research upgraded iRhythm Technologies Inc (NASDAQ:IRTC) to Outperform with a 115 price target.

Wolfe Research has issued an upgrade call, citing a sensible entry valuation for the stock, which is currently priced at $98. The Wolfe analysts have expressed increased confidence in the stock, anticipating a key overhang to be resolved within the next 12 months, leading to a target price of $115. This target is supported by a DCF analysis and an EV/revenue comparison, suggesting that $115 is roughly 5 times the projected 2025 revenue.

Over the past year, IRTC’s EV/revenue ratio has averaged 5.5 times, and since its IPO, the average has been nearly 9 times. Compared to 30 small to mid-sized medical technology companies that currently average nearly 3.5 times, Wolfe argues that a premium of 5x is justified for the equity. The rationale behind this premium is IRTC’s expected high-teen percentage revenue growth for the next year, surpassing the low-teen percentage growth anticipated for the comparison group.

The Wolfe analysts’ valuation framework includes a comprehensive DCF model for IRTC, which has historically been challenging but has become more manageable over time. Improvements in modeling could arise from significant EBIT margin leverage in the second half leading into 2025 and successful execution of the Zio AT FDA risk reduction roadmap. Advancing beyond FDA issues would bring IRTC closer to launching its next-generation MCT device, potentially capturing a larger market share in a substantial market where IRTC is currently a minor player.

Ultimately, the DCF analysis indicates a NPV consistent with the $115 target, using a 9% discount rate and a 5% terminal growth rate.

Outperform at Wolfe means “The security is projected to outperform analyst's industry coverage universe over the next 12 months.”

Micron

What happened? On Friday, Aletheia Capital downgraded Micron Technology Inc (NASDAQ:MU) to Hold with no price target.

Aletheia Capital has downgraded MU to ‘Hold’ from ‘Buy’ and removed their $120 target price. The first reason for this is that the stock has seen a 2.1x increase since their rating upgrade in November 2023 and is now trading above its historical 2.5x Price-to-Book Ratio (PBR).

Secondly, Aletheia Capital senses there are teething issues with MU’s HBM3E execution which may negatively impact its near-term revenue target and profitability. A key customer may have to reschedule the commercial shipment of new products. The research team believes it could take some time for MU to improve and regain confidence in its HBM offering. Consequently, they have withdrawn their previous $500 million HBM revenue projection for FY24E.

Lastly, Aletheia Capital believes MU has to significantly increase its capital expenditure (capex) to expand capacity in FY25E/26E, which has remained stagnant (or even decreased) since C2021. This is in contrast to the well-known positives such as the continuous upward trend of memory Average Selling Price (ASP), strong demand for HBM from AI servers, upward earnings revision, and having its FCF turn positive (first since 1QFY23).

How did the stock react? Micron opened the regular session at $138.08 and closed at $139.54, a decline of 3.22% from the prior day’s regular close.

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