Lululemon Athletica NASDAQ 🙂 recently pulled back from all-time highs, and the stock is near the 2020 highs reached about a year ago. The company reports FQ2 after the market closes on Sept. 8. LULU closed at $391.16 on September 1, 2020, after which the shares began to decline. The company reported FQ2 2020 results on Sept. 8, which beat expectations for earnings per share and revenue, but shares continued to fall, closing below $300 on Sept. 18. Shares spent much of the past year below $350, but recovered to close the YTD high of $414.52 on Aug. 30. That rise in stock prices was driven by strong FQ4 results (reported March 30). The shares are currently trading at approximately $390.
Source: eTrade. Green (red) values ??indicate the extent to which the EPS exceeded (missed) expectations.
Looking at lagging returns for different time horizons tells an interesting story. For the 12-month period through September 3, stocks are up 2.77%, compared to 35.4% for the retail apparel industry and 35.1% for the US stock market as a whole. However, over the lagging 3 and 5 year periods, LULU has delivered an annualized return that far exceeds that of the retail apparel industry or the market as a whole. Source: Morningstar.com. Lagging returns for LULU versus the retail apparel industry and the US stock market as a whole.
LULU has a forward P/E of 57.1, much higher than Under Armor (NYSE:), which has a forward P/E of 36.2, and Nike (NYSE:), which has a forward P /E of 38.5. The question is whether the market believes the LULU stock price has moved too far above short-term earnings expectations or that a broader revaluation is underway. The valuation of a stock with this high P/E ratio is sensitive to variations in earnings growth expectations.
To formulate an opinion on LULU, I rely on two forms of consensus outlook. The first is the consensus of analysts on Wall Street. When there is reasonable agreement among the analysts, the consensus price target has predictive value. The second form of consensus is the market implicit outlook, a probabilistic outlook for price returns derived by analyzing the prices of call and put options on the stock. The price of an option represents the traders' consensus estimate of the probability that the price of LULU will rise above (call option) or below (put option) a certain level (the strike price) (the strike price) between now and when the option expires. By analyzing call and put option prices at a series of strikes and a common expiration, it is possible to infer the probabilities of future returns than to reconcile option prices. For readers unfamiliar with this concept, I have written an overview post, including links to the relevant financial literature.
Wall Street Consensus Outlook for LULU
eTrade's calculation of the Wall Street consensus combines the views of 9 ranked analysts who have expressed an opinion in the past 90 days. The consensus rating for LULU is bullish and the consensus price target for 12 months is 13.56% above the current price. Even the lowest price target is 4.3% above the current price.
Consensus outlook and price target
Source: eTrade
Investing.com's version of the Wall Street consensus is calculated with 32 analysts. While the consensus rating is bullish, the consensus price target implies a 12-month return of just 3.92%. The average price target is pulled down by a $275 price target from BMO Capital analyst Simeon Siegal, which is not included in eTrade's group of ranked analysts.
Consensus assessment and price target
Source: Investing.com
This situation motivates to look at more than one Wall Street analyst consensus calculation. The eTrade ranked analyst consensus (rankings provided by Tipranks) has a significantly more optimistic price target than the broader analyst consensus. However, both consensus outlooks are optimistic. 2022) and a time horizon of 6.3 months (using options expiring on March 18, 2022). I've selected these two periods to give a picture through the end of this year and into early 2022. The trading volume of options on LULU is not very high, especially for the March 2022 options, so look at two different time horizons gives more confidence in the consistency of the market-implied outlook.
The standard presentation of the market-implied outlook is in the form of a probability distribution of price return, with probability on the vertical axis and price return on the horizontal axis.
Market Implied Price Return Opportunities
Source: Author's calculations using option quotes from eTrade for the 4.5 month period from now to January 21, 2022.
The market-implied outlook for the next 4.5 months is generally symmetrical, with similar opportunities for positive and negative returns of equal magnitude. The peak probability corresponds to a price return of +5%. The annual volatility derived from this distribution is 35.3%.
To make it easier to directly compare the probabilities of positive and negative returns, I'm looking at a version of the probability distribution of returns where the negative returns revolve around the vertical axis (see chart below). 21, 2022. The negative yield side of the distribution is rotated about the vertical axis. Although the peak probability is not well defined, the chances of positive returns are consistently slightly higher than for negative returns of the same magnitude (the blue line is above the red dotted line for many of the most likely returns). Theoretically, market-implied outlook is expected to be negatively biased due to risk-averse investors buying put options. The positive tilt in this market implied outlook is a bullish indicator. -month period from now until March 18, 2022. The negative yield side of the distribution has rotated around the vertical axis.
The 6.3-month outlook to mid-March is bullish, consistent with the 4.5-month results. The odds of a positive return are consistently higher than those of a negative return of the same magnitude. The peak probability corresponds to a price return of +5.6% and the annualized volatility is 35.6%. Options trading for this time horizon is lean, but consistency with the shorter-term outlook gives confidence. especially for the recent 3 and 5 year periods. The current valuation reflects the expectation that the company will be able to achieve high earnings growth. In this situation, a stock can experience rapid declines if investors startle, as LULU's price history for the past 12 months shows. Wall Street's consensus outlook for LULU is bullish, with a 12-month price increase projected from 3.9% to 13.6%, depending on which consensus calculation you're looking at. The market-implied outlook for early 2022 is bullish, with expected (year-on-year) volatility of around 35%. I tend to discount the lower consensus price target due to the impact of the $275 outlier, in light of the positive stances of the market implied outlook and the otherwise consistently bullish stances. My final overall rating is bullish.
