L Brands, Inc. (LB) shares rose more than 1% during Tuesday's session after BMO Capital upgraded the stock to Outperform with a price target of $17.00 per share, representing a significant premium of around 40% over yesterday's closing price.
Analyst Simeon Siegel believes that noise will dissipate and that it will be harder to ignore the underlying fundamental value of the owner of Victoria's Secret and Bath & Body Works. Siegel believes that the stock could have 50% to 70% upside potential as the company works to reset itself amid the market turmoil.
The analyst upgrade comes a day after Sycamore Partners' planned investment in Victoria's Secret was canceled. Despite the deal falling through, L Brands' management and board remain committed to establishing Bath & Body Works as a pure-play and taking steps to prepare Victoria's Secret to operate as a separate standalone company.
Wedbush analyst Jen Redding also warned that L Brands' debt-to-capital ratio of 1.37x creates a lot of uncertainty about its ability to stay afloat in the mid-term to long term, although the April 24 amendment to its revolving credit facility serves as relief to short-term liquidity risks.
From a technical standpoint, the stock has been trading in an increasingly narrow price range since mid-March. The relative strength index (RSI) remains neutral with a reading of 46.68, but the moving average convergence divergence (MACD) remains in a bullish uptrend toward the zero line. These indicators suggest that the stock could have more room to run.
Traders should watch for a breakout from the consolidation pattern to reaction highs of $17.00 or the 200-day moving average at around $18.00. If the stock breaks down, traders could see a move to retest support at $10.00 or lows of around $8.00 over the coming sessions. The news from Sycamore Partners and BMO Capital creates some uncertainty as to direction.
The author holds no position in the stock(s) mentioned except through passively managed index funds.