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Why Ralph Lauren (RL) Was Upgraded

Stocks in this article: RL

Story updated at 10:05 a.m. to reflect market activity.

NEW YORK (TheStreet) -- Ralph Lauren (RL) was upgraded to "outperform" from "market perform" by Wells Fargo Wednesday.

Ralph Lauren gained 1.6% to $162.51 in morning trading.

The bank raised its valuation ranger for the company to between $186 and $197 from between $166 and $171. Analyst Evren Kopelman said the upgrade is due to several new initiatives that could help accelerate growth for the clothing company.

"We see an inflection point for RL with several new initiatives that could accelerate sales growth. EPS revisions could turn positive on sales momentum as we believe investment spending-related margin pressure for FY2015 is already well laid out by RL and is mostly in consensus estimates and the stock," Kopelman said.

"We also see a potential acceleration in share buybacks. Our valuation range is $186-197 (vs. $166-171 prior) based on 18-19x our FY2016E EPS of $10.35, in line with RL's historical valuation and peers, and a higher multiple than we applied previously due to the upcoming improvement in EPS profile."

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Separately,TheStreet Ratings team rates RALPH LAUREN CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate RALPH LAUREN CORP (RL) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, reasonable valuation levels, growth in earnings per share and expanding profit margins. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • RALPH LAUREN CORP has improved earnings per share by 11.3% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, RALPH LAUREN CORP increased its bottom line by earning $8.00 versus $7.13 in the prior year. This year, the market expects an improvement in earnings ($8.40 versus $8.00).
  • Despite its growing revenue, the company underperformed as compared with the industry average of 17.0%. Since the same quarter one year prior, revenues slightly increased by 9.1%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • RL's debt-to-equity ratio is very low at 0.14 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, RL has a quick ratio of 1.97, which demonstrates the ability of the company to cover short-term liquidity needs.
  • The gross profit margin for RALPH LAUREN CORP is rather high; currently it is at 58.16%. Regardless of RL's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, RL's net profit margin of 11.76% compares favorably to the industry average.
  • You can view the full analysis from the report here: RL Ratings Report

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