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 Restoration Hardware Holdings (RH 1.32%) opened Thursday up slightly after Nomura Securities initiated coverage on the home furnishings retailer with a buy rating.
So what: Along with the bullish call, analyst Jessica Schoen Mace planted a price target of $100 on the stock, representing about 15% worth of upside to yesterday's close. So while contrarian traders might be turned off by Restoration's sharp rally in recent months, Schoen Mace's call could reflect a sense on Wall Street that the benefits of its real estate transformation still aren't fully baked into the valuation.
Now what: According to Nomura, Restoration's risk/reward trade-off is rather attractive at this point. "The company has a unique opportunity, in our view, as it has been under-utilizing its square footage footprint and only displaying 15% of its merchandise at any given time," said Schoen Mace. "The company stated that it sees a 50–150% sales lift on merchandise when it is displayed in stores and that it now has the opportunity to increase its assortment by 2.5–7.0x in its new store formats. We expect the real estate transformation to drive results better than the company's plan of 20% top-line growth, high 20% EBITDA growth, and mid-to-high 20% EPS growth." With Restoration shares now up more than 35% over just the past two months and trading at a forward P/E of 30, however, I'd hold out for a wider margin of safety before betting too heavily on that upbeat outlook.
