Morgan Stanley Downgrades Michaels, Cites Lack Of Catalysts

Michaels Companies Inc MIK shares were down more than 5 percent Monday after the retailer's stock was downgraded by Morgan Stanley. 

The Analyst

Simeon Gutman downgraded Michaels Companies from Overweight to Equal-weight and lowered the price target from $17 to $10.

The Thesis

Michaels has a small chance of a positive inflection in fundamental performance in the near-term, Gutman said in the Monday downgrade note. (See his track record here.) 

“This is the catalyst of our ratings change, as we no longer think potential financial leverage from debt paydown/share repurchases is enough to drive outperformance for the stock." 

Morgan Stanley's previous upgrade to Overweight in early 2017 was based on the view that the business was attractively valued relative to its free cash flow profile, “as we thought financial leverage could drive stock outperformance," the analyst said. 

Yet a 15-percent share count reduction and flattish debt have not been enough to offset weaker-than-expected operating performance, Gutman said. 

Although the analyst said Michaels is significantly cheaper on valuation, he said the immediately challenges facing the retailer are compounded by the lack of a permanent CEO and emerging questions around its longer-term strategy.

“This makes us more comfortable downgrading the stock here." 

Price Action

Michaels Companies shares were down 5.22 percent at $9.90 at the time of publication Monday. 

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