Lululemon Finally Becomes a Buy

An analyst upgrade on Tuesday prompted this review, but the reality is that the value proposition seems to be building. The consensus for a better value is also building at multiple firms.

Lululemon was raised on Tuesday morning to Outperform from Market Perform, and the price target was raised to $63 from $53, at Oppenheimer. The firm called it a compelling entry point for a premier brand and growth story and said:

We are upgrading LULU to Outperform from Perform with a $63 price target. While we could be early (depends on comp trajectory), Lululemon is one of the most controversial stocks in retail, and we believe brand equity remains intact. After self-inflicted 2013, there should be levers to accelerate top-line and bottom-line growth, driven by double-digit square footage growth, double-digit growth online, and margin recovery over time. With a new management team, there’s a transition story as well. The stock’s multiple has the contracted by 8 points since luon recall, and as comps stabilize with product flow issues rectified, valuation should expand given brand’s premium positioning and compelling growth profile.

The stock was also initiated in new coverage at Nomura on February 13 with a Buy rating. Nomura’s price target of $70 is well above the consensus.

RBC Capital Markets raised Lululemon’s rating back on February 8 to Outperform from Sector Perform with a $56 price target. What stands out here is that the stock had fallen to $45.45 prior to the analyst call, and the 52-week low was very close at $44.32.

If you count a positive analyst call from Citigroup the day before RBC’s upgrade, this technically makes for four positive analyst calls. Now Lululemon has two key events to watch on its chart via the moving averages. The 50-day moving average is up at $54.32, and then the key 200-day moving average is up at $67.08.

It seems unlikely that Lululemon’s 52-week high of $82.50 will be relevant again. After all, at that price Lululemon would be valued at 37 times next year’s earnings estimate. After a 1.5% gain to $51.85 so far on Tuesday morning, Lululemon trades at a much more reasonable valuation of about 23 times next year’s expected earnings.

The current consensus price target from Thomson Reuters is $59.75. It seems as though more and more market strategists are becoming much more comfortable with Lululemon.