What happened
Shares of lingerie retailer Victoria's Secret (VSCO +1.87%) closed 20.1% higher on Monday after J.P. Morgan initiated coverage of the company with an overweight rating and a $100 price target.
So what
Based on its 2023 estimates for earnings before interest, taxes, depreciation, and amortization (EBITDA), J.P. Morgan calculates that Victoria's Secret stock sells for a multiple below 3, StreetInsider.com said in a report on J.P. Morgan's note. But the average stock in the specialty retail sector trades for a 2023 EBITDA multiple of 6, more than twice that.
And yet, the analyst company says Victoria's Secret has the leading share of U.S. lingerie sales, at 20%, and a 30% share of the perfume market.
Image source: Getty Images.
Now what
J.P. Morgan also argues that Victoria's Secret is a stock to buy based on its potential to generate about $875 million in positive free cash flow (FCF) in the 2022-2023 time frame.
At a current valuation of just $5.3 billion in market capitalization, that means the stock costs only about 6 times 2022 free cash flow, as well as 6 times 2023 EBITDA. Moreover, based on free cash flow over the last 12 months, the stock looks even cheaper today: just 4.9 times trailing FCF.
Even if you think lingerie isn't a high growth market, it shouldn't take very much growth at all to justify J.P. Morgan's $100 valuation and its recommendation today.
