At This Valuation, RH Risks Outweigh A Compelling Story

Bank of America reinstated coverage on RH RH with an Underperform rating and $54 price target.

Analyst Curtis Nagle believes the company’s risk profile is greatly increased, and sees a base case downside potential of 19 percent, which could go as low as 61 percent. The upside scenario would see a 38 percent rise in share price.

Short-Term Risk

Nagle is concerned by RH’s $1 billion buyback this year, which is primarily funded by debt and the sale of marketable securities.

The method is “overly aggressive” and an “imprudent use” of capital which leaves little room for execution missteps, according to Nagle.

The analyst noted that 42 percent of shares were short as of the end of June and half of all shares have been repurchased, increasing the possibility of a short squeeze.

That said, the buyback could be an indication from the company that earnings serve up good news for investors, and Nagle’s estimates could be too low.

See Also: What's Going On With RH?

Long-Term Potential

“We see RH as one of the few compelling [long-term] growth stories in home furnishings,” said Nagle, despite its current standing.

Nagle’s faith in the company stems from its positioning between the “fragmented high end design segment” and larger national brands.

“RH has created a truly differentiated and engaging retail experience,” said Nagle. That experience will be key in fending off e-commerce.

Nagle also likes the company’s move away from frequent promotions, opting instead for a membership discount model.

Follow along with rating changes and company news in real-time with Benzinga Pro.