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Why Victoria's Secret Stock Soared 20% Today

By Rich Smith – Aug 9, 2021 at 5:14PM

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J.P. Morgan likes this recent spinoff.

What happened

Shares of lingerie retailer Victoria's Secret (VSCO 3.06%) 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, 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.

Arrow angles up on a green stock chart

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.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

Victoria's Secret & Co. Stock Quote
Victoria's Secret & Co.
$44.43 (3.06%) $1.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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