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Discussing the downgrade, Wolfe analysts said, “This is largely a valuation call — our fundamental view on SWK has not changed, but the stock has been keying off optimism that the new housing market has bottomed. We also believe that the stock is benefiting from the view that earnings expectations have bottomed — we largely agree.”
However, the analysts said they could not discount recession risk, and he sees potential margin risks entering 2024. They also warned that balance sheet leverage is expected to remain elevated.
They concluded, “If management can execute fully on its $2bn cost reduction plan then there is a path to $7-8 EPS in 2025, which could support a valuation in the $120-130 range. Equally possible is deteriorating demand fundamentals and margin offsets that restrain 2025 EPS to $4-5 (vs. ~$1 in 2023e). Our bear/bull spread of $61-124 and base case of $94 suggests a negative risk/reward and drives our downgrade to an Underperform rating.”
