Wells Fargo: Street Estimates For RH Are Too Low, Valuation Doesn't Reflect Growth Outlook

If the economic cycle is near its peak, investors shouldn't be faulted for being lukewarm on luxury retailers including RH (NYSE: RH) — but a bullish case for the stock remains, according to Wells Fargo. 

The Analyst

Analyst Zachary Fadem reinstated coverage of RH with an Outperform rating and $145 price target.

The Thesis

Investors should be buyers of RH's stock for two key reasons, Fadem said in a Tuesday note. (See his track record here.) 

They are: 

◘ The Street's estimates for the upscale home furnishings retailer are too low, the analyst said. 

Wells Fargo's 2018 EPS estimate of $7.72 and 2019 EPS estimate of $8.85 are 1- percent and 6-percent above consensus estimates, respectively.

The Street may not fully appreciate the company's earnings outlook as RH continues to move toward its goal of EBIT margins in the low-to-mid teens, the analyst said, adding that EBIT margins should expand 442 basis points in 2018 to 11.4 percent and expand another 109 basis points in 2019 to 12.5 percent.

◘ RH's valuation doesn't factor in the company's long-term growth outlook, Fadem said. RH is trading at 13.9 times the next-12-months P/E — notably below its pre-2016 levels of around 30 times, he said. The stock is trading at a discount of more than 50 percent on a NTM P/E multiple versus high-growth retailers.

The Street may be missing the long-term picture, which includes expectations for a 30-40-percent sales lift per market from its new gallery formats, which implies a $450-million opportunity from bigger ticket sales, according to Wells Fargo.

The company also faces a $260-million opportunity in new markets in 2019 and 2020, along with the potential for another $225 million of hospitality revenue, Fadem said.

Over the much longer term, the retailer's international expansion represents a total opportunity of $3 billion to $5 billion, the analyst said. 

Price Action

RH shares were down 3.23 percent at $110.88 at the time of publication Tuesday. 

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