Few things can hurt a stock as much as when analysts cut their forecasts for earnings. A worsening outlook is something no investor wants to see.
Yet there comes a point where estimates fall so much that it could signal a buying opportunity. Enormous declines in the consensus call for earnings per share should mean that Wall Street has factored in most, if not all, of the bad news about a company.
Take Beyond, formerly known as Overstock, which purchased some of
Bed Bath and Beyond’s
assets after it filed for bankruptcy. According to
FactSet,
the average analyst estimate is for a loss of $1.83 a share for its fiscal 2024, more than 10 times the 18-cent loss expected in early July.
That is one reason why Needham analyst Anna Andreeva raised her rating on the stock to Buy from Hold on Friday. She set a target of $40 for the price, implying a hefty gain in the price.
The consensus call for 2024 earnings before interest, taxes, depreciation, and amortization has fallen spectacularly as well, she noted, meaning that expectations likely can’t get much worse.
Of course a rock-bottom outlook isn’t the only reason she’s recommending the shares. Andreeva acknowledged that there’s a “wide range” of outcomes for Beyond’s profitability this year and next, but said she likes the company’s “self-help initiatives to rein in expenses, capitalize on Bed Bath and Beyond market share/loyalty, with [Chairman] Marcus Lemonis at the helm as the agent of change.”
In fact, if Beyond can create a more variable expense base that’s aligned more closely to what an asset-light business needs, she said, as much as a third of the company’s nonlabor operating costs could be cut. In simpler terms, because Overstock focuses on e-commerce, while Bed Bath ran a big network of stores, it may be able to eliminate some fixed expenses.
Moreover, unlike when Bed Beth was burning through cash in the final quarters of its time as a public company, Beyond has ample liquidity, with a healthier 27% of its market cap in cash.
Andreeva also noted that the fiscal fourth quarter—the crucial holiday period for retailers—could surprise on the upside. Consensus expectations are pessimistic, perhaps too much so, she said.
It’s fair to say that Andreeva is unusual in her optimism. Before Andreeva’s upgrade, Wedbush was the only one of the 10 firms covering Beyond shares to rate it at Buy. The other eight now have it at Neutral.
It makes sense that so many view Beyond as a show-me story. Bed Bath’s decline was a long and public one, while Overstock had plenty of its own difficulties last year, including lower revenue growth and a loss in its most recent quarter, reported in October. The company is going through what it has described as an “intense“ restructuring, including revamping much of its C-suite.
Moreover, the home goods industry in general is in a tough spot, given that many consumers already moved or redecorated during the pandemic, and are less inclined to spend on this category today. High interest rates make matters worse.
So it is certainly possible Beyond will have more downbeat news to report about its holiday quarter and 2024 outlook when it reports results in February.
Nonetheless, Andreeva’s $40 target implies a jump of more than 50%, even after a 3% gain to $26.32 in response to her call on Friday morning. Wedbush’s target is some 25% above Friday’s levels. Investors looking to bet they are right can be confident that the bar for Beyond’s financial performance can’t go much lower.
Write to Teresa Rivas at [email protected]
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