Is Urban Outfitters Stock Too Expensive?

In a report published Friday, Maxim Group analysts maintained a Hold rating on Urban Outfitters Inc (NASDAQ: URBN), while raising the price target from $26 to $32.The EPS estimate for 2016 has been raised from $1.83 to $2.01. The analysts are still skeptical about Urban Outfitters being able to meet its gross margin goals. They assume that the company would repurchase $500 million worth of shares, which at the current price, translates to a buyback of 11.2 million shares, being accretive by $0.18. There may be only small improvements in operating margin and net income. "We believe that the lack of organic earnings growth and the overall state of specialty retail concepts warrant a 6.0x EV/EBITDA multiple. The risk, in our opinion, comes from the market pricing a significant recovery (that we have our doubts will occur) into the current share price," the report said. Investors seem to be expecting the company to return to near-peak operating margins by 2018. This implies "a rather remarkable recovery from the 11% operating margin in the recently completed FY15," the analysts noted. A significant gross margin recovery is unlikely given the "ongoing promotional environment."The share price has increased recently, with investors looking at the QTD comp and perceived easy compares. "We expect mid-single digit comps early in the year and low single digits in the back half. Investors seemed encouraged when management indicated that Q1 QTD comps were in the mid-single digits. However, compares become progressively more difficult," the analysts wrote.