On Wednesday, Barclays (LON:BARC) made adjustments to its perspective on Vestis Corp (NYSE:VSTS), downgrading the stock from Equalweight to Underweight, despite increasing the price target to $19 from $17.
The revision follows the company's fourth-quarter earnings and subsequent conference call, with the firm's analysis indicating that the current valuation fully incorporates a stable to constructive macro and housing environment expected this year.
The downgrade is attributed to Vestis Corp's significant outperformance in recent months, with a 42% rise since December 13, outpacing the building products sector's average increase of 13% and the S&P 500's 8% gain during the same period.
This surge has resulted in a considerable multiple expansion, with the stock now trading at approximately 14 times the estimated 2024 EBITDA, a jump from around 10 times in mid-December.
In terms of the company's 2024 outlook, growth is anticipated to be led by single-family residential construction, primarily due to national production builders. Despite an expected decline in multi-family starts, Vestis Corp projects sales growth in this segment as well, supported by strong backlogs and confidence in gaining market share.
The company also expects to maintain its gross margin at the high end of its long-term target range of 30-32%, with a 33.5% margin achieved in 2023.
The fourth-quarter results revealed that total and organic sales increased by 5% and 2%, respectively, surpassing estimates. However, adjusted operating margins were slightly below expectations at 15.8%. Consequently, Barclays has slightly lowered its 2024 and 2025 adjusted EBITDA estimates for Vestis Corp to $530 million and $580 million, respectively.
The new price target of $19 set by Barclays is based on a target EV/EBITDA multiple of approximately 13 times the firm's estimated 2024 EBITDA, which represents a modest discount to the stock's current trading multiple but is still about two turns above its five-year average.
This target reflects a balanced view of the company's sustained margin expansion, merger and acquisition strategy, and the anticipated stable macro and housing environment. Despite the stock's relatively high valuation compared to its peer BLD, Barclays maintains a Neutral rating, acknowledging Vestis Corp's solid execution and positive market outlook.
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