Analyst Paul Lejuez believes that the previous plan of Gap's board to spin off Old Navy demonstrates a willingness to unlock shareholder value, and with the growth in athleisure, Athletica's brand value may not be fully appreciated by the market. In fact, Lejuez estimates that the brand could be worth about $3.6 billion at the midpoint of the valuation estimate.
A sum-of-the-parts (SOTP) valuation is the process of valuing a company by determining what its aggregate divisions would be worth if they were spun off or acquired by another company.
Given Gap's enterprise value of just $6.5 billion, the analyst believes that a sum-of-parts analysis implies big upside potential and raised his price target from $12.00 to $24.00 per share. The new price target reflects a 54.8% premium to Tuesday's opening price and greatly exceeds the average analyst price target of just $12.02.
From a technical standpoint, Gap stock broke out to fresh highs during Tuesday's session. The relative strength index (RSI) rose toward overbought levels with a reading of 69.40, while the moving average convergence divergence (MACD) continued to trend sideways. These indicators suggest that the stock could see some near-term consolidation, but the long-term picture remains uncertain judging by the MACD.
Traders should watch for consolidation above trendline resistance at around $16.00 over the coming sessions. If the stock breaks out, traders could see a move toward prior highs of $19.00. If the stock breaks down, traders could see a move to lower trendline support at around $15.00. A further breakdown from those levels could lead to the 50- and 200-day moving average levels at around $13.00, although that scenario appears less likely to occur.
The Bottom Line
Gap shares moved sharply higher during Tuesday's session after Citi upgraded the stock to Buy and doubled its price target to $24 per share, citing a sum-of-parts analysis. After the move higher, the stock is approaching overbought conditions that could point to consolidation before another leg up.
The author holds no position in the stock(s) mentioned except through passively managed index funds.