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A Morgan Stanley analyst downgraded Levi Strauss (NYSE:LEVI) to Equal Weight from Overweight as she sees a more balanced risk-reward following the recent run-up in shares.
LEVI stock is up over 20% in the last 4 weeks, which signals the market is more appreciative of the opportunity Morgan Stanley “recognized since IPO.” The LEVI stock price has also reached the analyst’s price target of $19 per share.
“With this move, valuation has expanded to more fair levels – at 12x forward P/E & 8x forward EV/EBITDA compared to 9x & 6x, respectively, only one month ago,” the analyst said in a client note.
Moreover, she also made the move to downgrade LEVI shares amid deteriorating macroeconomic data points, ongoing elevated apparel import levels, and negative pre-announcements and/or earnings reports.
“These macroeconomic & industry-specific data points limit both short & medium-term visibility, & mean FY guidance is broadly at-risk across the retail landscape. While we are comfortable with LEVI’s current inventory levels & leave our FY estimates unchanged for now, we worry the abundance of inventory across the market could limit LEVI’s prospects for further upward earnings revisions from here,” the analyst concluded.
Still, the analyst reaffirmed her long-term positive thesis on Levi Strauss as the company is “in early innings of DTC, international, & under-penetrated category (e.g., tops, women’s, etc.) growth, all of which present runways for margin expansion & higher EPS growth over time.”
