Why Michael Kors Holdings Ltd Shares Plunged

Does this analyst make a good case? Or is it just more noise from Wall Street?

Jul 15, 2014 at 12:35PM

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Michael Kors Holdings Ltd (NYSE:KORS) fell 6% today after Maxim Group downgraded the luxury retailer from buy to hold.

So what: Along with the downgrade, analyst Rick Snyder lowered his price target to $85 (from $109), representing about 1% worth of downside to yesterday's close. So while contrarian traders might be attracted to Michael Kors' price weakness in recent months, Snyder's call could reflect a sense on Wall Street that its growth prospects are just too limited to trigger a significant rebound.

Now what: According to Maxim, Michael Kors' risk/reward trade-off isn't too attractive at this point. "Our checks indicate that this has led to increased markdown activity, which is likely to pressure gross margin," said Snyder. "Our new price target of $85.00 emanates from applying a 0.80x PEG, from 1.0x previously, on our 2016 EPS estimate of $4.88. We believe that current concerns over Michael Kors' gross margin will lead to multiple contraction as investors lose confidence in their near-term growth prospects." With Michael Kors shares now off about 20% from their 52-week highs and trading at a forward P/E in the mid-teens, however, those short-term concerns might be providing patient Fools with a juicy long-term growth opportunity. 

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Brian Pacampara has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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