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Why Gap Inc. Shares Rallied This Morning

By Brian D. Pacampara, CFA – Feb 4, 2014 at 10:31AM

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

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 upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Gap (GPS 3.05%) gained 2.5% this morning after UBS upgraded the apparel retailer from neutral to buy.

So what: Along with the upgrade, analyst Roxanne Meyer boosted her price target to $50 (from $41), representing about 34% worth of upside to yesterday's close. While momentum traders might be turned off by the stock's steady decline over the past six months, Meyer thinks that Gap is now too juicy to pass up given management's strong turnaround progress of late.

Now what: According to UBS, Gap's risk/reward trade-off is particularly attractive at this point. "We look for GPS to deliver 15%+ EPS growth over the next 3 years and potentially over $5 of EPS in FY17 due to increased square footage growth and an ability to deliver positive comps from industry-leading e-commerce initiatives, outsized exposure to athletic apparel, and inflection at the core businesses," noted Meyer. "All these opportunities lead to one of the highest incremental margin stories in the industry." When you couple that growth and margin enhancement potential with Gap's cheapish forward P/E of 13, it's tough to disagree with UBS' upgrade. 

Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

Stocks Mentioned

Gap Stock Quote
Gap
GPS
$14.85 (3.05%) $0.44

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

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