Raymond James Upgrades RH With A Disclaimer: Stock 'Not For The Faint Of Heart'

Furniture retailer RH RH's stock rose more than 130 percent over the past year, but a 12-percent decline since the turn of the year makes it an attractive buy, according to Wall Street's newest bull analyst.

The Analyst

Raymond James' Budd Bugatch upgraded RH from Market Perform to Outperform with a newly established $95 price target.

The Thesis

RH's stock flirted with the $100 level on multiple occasions in 2015, only to trade below $50 per share for most of 2016. The stock rebounded above $100 in 2017 and 2018, but is negative since the start of the year.

RH is "not for the faint of the heart," Bugatch said in the Wednesday upgrade note. 

"Nonetheless, with the heavy lifting of the company's sizable business transformation now behind them and RH's 12-percent year-to-date decline (versus a 3-percent increase for the S&P 500), we believe RH's current valuation ... now offers a favorable risk-reward scenario." 

RH's growth plan is based not only on increasing the footprint of its Full Line Design Galleries, but adding hospitality features, the analyst said. This creates a shopping experience that is "difficult, if not impossible" to replicate online — adding an e-commerce-proof element to the story.

Investors have reason to be "more comfortable" with RH's working capital metrics, Bugatch said. The retailer is dedicated to  redesigning its supply chain, reducing inventory, improving free cash flow and deleveraging the balance sheet, he said. 

RH stock is trading at just 14x the analyst's forward four-quarter adjusted EPS estimate of $5.43, which represents a discount to its three-year median forward multiple of 20.5x. The analyst's $95 price target represents a 15x multiple on fiscal 2019 adjusted EPS of $6.47.

Price Action

RH shares were up 3.21 percent at $78.46 Wednesday afternoon. 

Related Links: 

Benzinga's Top Upgrades, Downgrades For March 14, 2018

After A Year Of Improvement, RH Is A Buy, Says Loop Capital Markets 

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