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Why RH Stock Rose despite Near-Term Concerns

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  • RH stock closed 5.3% higher despite near-term growth concerns.
  • Investors supported RH’s upbeat guidance.

Why did RH stock rise?

RH (RH) stock rose 5.3% despite expected weakness in its sales and margins in the short term. Notably, RH stock was trading lower during the after-hours of trade on Tuesday following the company’s second-quarter conference call. However, the company beat analysts’ expectations in the second quarter and raised its fiscal guidance, which lifted investors’ sentiments.

Multiple analysts raised their target price on RH stock, which supported the upside. Analysts made the following upward revisions to their target price:

  • UBS increased its target price to $160 from $138.
  • Telsey Advisory Group has a target price of $175—up from $140.
  • Wedbush increased its target price to $170 from $160.
  • Wells Fargo raised its target price to $175 from $150.
  • Stifel increased its target price to $196 from $153.
  • J.P. Morgan raised its target price of $180 from $156.
  • Cowen raised its target price to $155 from $135.

Analysts have a consensus target price of $171.92 on RH stock, which implies an upside of about 3% based on its closing price of $166.95 on Wednesday.

What’s the outlook? 

RH’s management expects its third-quarter sales to mark 5%–6% growth, which indicates a sequential deceleration. In the first half of 2019, the company’s top line increased by about 9%. Exiting underperforming businesses and closing a distribution center will likely restrict the company’s top-line growth rate. Meanwhile, the third-quarter gross margins will likely be 40.1%–40.4%, which indicates a YoY (year-over-year) decline of 30 basis points–60 basis points.

Despite near-term challenges, we expect RH to sustain its momentum in the coming quarters. Management lifted the fiscal outlook. The company’s adjusted revenues will likely be $2.680 billion–$2.694 billion. Earlier, the company expected its revenues to be $2.658 billion–$2.674 billion.

RH’s adjusted EPS will likely be $10.53–$10.76. Previously, the company’s bottom line was expected to be $9.08–$9.52.

Analysts expect RH’s top line to increase by about 6% in the second half of 2019. Meanwhile, analysts expect the company to sustain the momentum in fiscal 2020. They expect close to 7% growth in fiscal 2020.

Analysts project about 20% growth in RH’s bottom line in fiscal 2019. The company’s bottom line will likely sustain a high growth rate despite tough YoY comparisons.

RH stock has risen 39.3% on a year-to-date basis as of Wednesday. The company’s current valuation looks attractive, which could support more upside. The stock trades at 14.1x its fiscal 2020 estimated EPS of $11.84. Analysts expect 15% growth in RH’s bottom line during that period.

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